Austria looks eastward

• Author: Natan Epstein
• Position: IMF European Department
• Pages: 240-241

Page 240

Situated at the heart of the European continent, Austria benefits from access to diverse markets, both mature and emerging. Historically, Austria's strong economic ties to Germany have provided a relatively stable growth path and a buffer against external shocks. Signs are emerging, however, that the Austrian economy is gradually becoming less dependent on Germany than before, while its links with the faster-growing economies of the Central and Eastern European countries are strengthening.

Austria's economic outlook is increasingly affected by its changing international economic and financial relationships. In particular, its growing economic and financial links with Central and Eastern Europe have helped diversify the economy and, recently, cushion it from relatively less favorable developments in Western Europe and Germany in particular.

Indeed, among the European Union (EU)-15 countries, Austria is likely to have benefited most from Central and Eastern Europe's transition to market economies and the subsequent entry into the EU of 10 new member states.

Austria's early focus on building economic and financial relationships with Central and Eastern Europe, including through the banking, industry, and transport sectors, is now bearing fruit; it has increased its exposure to a relatively fast-growing area in Europe, while reducing its dependence on traditional trade partners. This diversification of the economy is likely to bolster both future economic growth and stability.

The Austrian-German connection

Austria's output growth rates averaged 2.2 percent annually over the past 10 years, in line with average growth rates in the euro area (see chart, this page). But, in recent years, Austria's real GDP has outperformed its euro area counterparts. Between 2002 and 2004, Austria's real GDP rose, on average, by 1.6 percent a year, compared with growth rates of 0.6 percent in Germany and 1.2 percent in the euro area.

For decades, developments in the Austrian economy have been closely associated with economic conditions in Germany, particularly on the trade side. Austria had much to gain from its close proximity to a large, prosperous economy. Over the past 20 years, Austria's exports to Germany more than tripled in constant U.S. dollar terms, accounting for just under 13 percent of Austria's GDP in 2004-roughly double the rate in the early 1980s...