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R 011546Z JUL 08
FM AMEMBASSY VIENNA
TO RUEHC/SECSTATE WASHDC 0479
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 VIENNA 000940 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV
SUBJECT: LEADERS USE AUSTRIAN ECONOMIC REPORT TO REVIEW 
DIVERGENT AGENDAS 
 
 ¶1.  Summary: At the June 30th presentation of the annual 
Austrian Economic 
Report, Minister of Economics and Labor Bartenstein and Vice 
Chancellor and Finance Minister Molterer, both members of the 
Austrian People,s Party (OeVP), presented an optimistic view 
of the Austrian economy, highlighting strong growth and 
emphasizing Austria,s economic advantages derived from 
globalization and the expansion of the European Union.  In 
contrast, Social Democratic Party (SPOe) Chancellor 
Gusenbauer, spoke on a more somber note about challenges 
facing Austria including inflation, global competition, and 
economic inequality.  The contrast between the two parties 
reflects a growing public divide between them, particularly 
on privatization, tax reform, and European integration. 
Molterer,s pointed emphasis that Austria was one of the 
"winners" from European integration and globalization was 
directed at the SPOe decision to put any future EU treaties 
to a popular vote, a sharp departure from the SPOe,s 
previous position.  The signs of increased tension evident in 
Monday,s event are widely taken as evidence an early 
election is increasingly likely.  End Summary. 
 
¶2.  The nominal purpose of the annual Austrian Economic 
Report is to review Austria,s economic performance over the 
past year and its future prospects.  The speakers agreed on 
many areas of strength, such as strong export growth and a 
lower than expected government budget deficit of 0.6%, as 
well as on several challenges facing the economy, including 
inflation, controlling government spending, tax reform, and 
the need to improve national competitiveness. 
 
¶3. Economics Minister Bartenstein focused on the country,s 
successful economic performance over the past year, citing 
strong GDP growth of 3.4% that exceeded the Euro zone average 
of 2.6%.  Austria had maintained its position as the fourth 
wealthiest land in the EU in GDP per capita, behind 
Luxemburg, Ireland, and the Netherlands, though the 
government had hoped to move Austria into third place, which 
also did not look likely for the next year as GDP growth in 
2008 was expected to slow to 2.2%.  Growth in 2007 was led by 
a 10% expansion in exports, with particularly strong growth 
in exports to Eastern Europe (17% over the previous year). 
Outward Foreign Direct Investment (FDI) reached a record high 
of 23.3 Million Euro, with 41% of investment directed toward 
Eastern Europe; Croatia, Turkey, and Russia were the largest 
recipients.  Inward FDI also reached a record level of 22.4 
Million Euro, with the largest sources being Italy, the 
Netherlands, and the U.S.  Both exports and FDI (inward and 
outward) were expected to slow in the next year due to rising 
inflation, high oil prices, weak consumption, and slower 
economic growth in 
Austria,s primary export markets and target investment 
countries. 
 
¶4. Bartenstein noted several overarching challenges to the 
Austrian economy.  Inflation rose from 2.2% in 2006 to 3.5% 
in 2007, the highest level since 1993.  While inflation was 
projected to drop to 2.7% in 2009 (assuming that commodity 
prices wouldn,t continue their abrupt rise and that a 
wage-price spiral could be prevented), addressing inflation 
has become a priority.  The GOA had begun monitoring energy 
and food prices more closely, and would expand measures to 
increase competition.  Bartenstein cited a lack of skilled 
labor, particularly in critical professions like engineering, 
as another problem area, and called for increased spending on 
education and workforce training, a call echoed by both 
Molterer and Gusenbauer.  Finally, Bartenstein emphasized the 
need to implement sustainable employment policies to reduce 
the burden on the national pension system.  He cited the 
success in the past year of increasing employment for workers 
aged 55 to 64 from 30% to 40%, which brought Austria in line 
with the European average, but he emphasized the need to 
continue to find ways to discourage early retirement. 
 
¶5.  Molterer began his remarks emphasizing that Austria had 
been one of the biggest beneficiaries of globalization and 
European integration - the only line from any of the speakers 
to provoke applause from an audience heavily represented by 
the business community.  Outside pressure from the EU forced 
Austria to implement necessary structural reforms, and 
businesses in Austria had leveraged EU expansion better than 
anywhere else in Europe.  Molterer,s praise of the EU was a 
direct response to Gusenbauer,s criticism of the EU, which 
appeared in the mass circulation tabloid Kronen Zeitung last 
Friday, and his decision to reverse previous SPOe opposition 
to national referenda on EU treaties (septel).  Molterer,s 
remarks about privatization and fiscal policy also 
contradicted positions later advocated by Gusenbauer. 
Molterer emphasized the need to enforce a strict "no-debt" 
policy for government spending, and he cited necessary 
reforms like simplifying the tax system to reduce the burden 
on families and social welfare programs.  He also pointed to 
 
VIENNA 00000940  002 OF 002 
 
 
privatization of state-owned enterprises as a way to decrease 
government debt and finance the welfare system.  Finally, 
Molterer complained that the environment for reform in 
Austria had considerably worsened, indicative of the current 
stand-still in reform as well as increasing tensions within 
the current coalition government. 
 
¶6.  Chancellor Gusenbauer focused on the challenges facing 
the Austrian economy, citing slower global growth, the U.S. 
mortgage crisis and its after effects, higher inflation, and 
rising income inequality.  He spoke at length about what he 
perceived to be growing fears of income erosion and 
increasing skepticism with Austria,s current economic 
trajectory, a reference to growing dissatisfaction with 
European integration -  the closest Gusenbauer came to 
addressing his comments in the Kronen Zeitung last week. 
Gusenbauer also emphasized the need for strategic investments 
in innovation in areas such as research and development, 
education, infrastructure, and climate change.  His calls to 
increase spending for social welfare coverage conflicted with 
Molterer,s emphasis on fiscal restraint.  Gusenbauer also 
rejected Molterer,s plans for privatization, stating that 
revenue from state owned enterprises was necessary to finance 
the welfare fund (in contrast to Molterer and the OeVP, which 
propose an increase in estate taxes). 
 
¶7. Comment.  Many observers saw in the event both signs of 
growing tension within the government - Gusenbauer and his 
conservative ministers even avoided looking at one another - 
and a foretaste of the economic themes the two parties would 
use should early elections be called. 
 
Kilner