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ANALYSIS: Can Austria's government get inflation under control?

Stefan Haderer
Stefan Haderer - [email protected]
ANALYSIS: Can Austria's government get inflation under control?
As inflation rises, energy and food prices have soared in Austria.(Photo: Soydul Uddin/Pixabay)

While other EU countries have seen inflation rates decreasing, Austria's remains high. So what is the government doing to control it and why is it failing?

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With inflation of 10.9 percent last month, Austria ranks at the top of all Western European countries. The average inflation rate in the 27 EU member states was 9.9 percent in February 2023

Experts and politicians, in general, agree on the causes for this worrisome development, blaming rising energy prices on the European market due to the war in Ukraine, wide-ranging sanctions imposed against Russia, and the aftermath of the Covid-19 pandemic. 

READ ALSO: High inflation: What’s keeping prices high in Austria?

What they disagree about, however, is how to fight and fix the persistent inflation problem in the long run. 

While economic experts and relevant social partners like Austria’s Chamber of Labour openly support price regulation and market intervention, the ÖVP-Green coalition government remains hesitant, emphasising that inflation is expected to drop in the coming months anyway. 

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Experts warn against Austria’s 'scattergun approach'

Over the past few months, the federal and regional governments have decided to support the Austrians with bonus payments. In March 2022, a €2 billion relief package was unveiled to fight rising costs of living. 

It included an energy bonus of €150 per household, a climate bonus of €500, an increased family allowance, a bonus for retired citizens as well as an electricity price brake between €400 and €800. In Vienna, about 600,000 households received an additional energy bonus of €200. 

READ ALSO: Tax cuts and bonus payments: Austria’s financial measures that will benefit people this year

Peter Hanke, executive councillor of finance in Vienna, has recently announced that 90 percent of the households in the capital are going to benefit from another €200 bonus as of April 11th this year – just before citizens are to expect another rent increase of about 8.6 percent, according to the Austrian Chamber of Labour.

Experts speak of a “scattergun approach” of distributing bonus payments in the middle of a crisis that is also affecting the middle class. Some feel concerned that this way of dealing with the issue may prove less effective and that the country could eventually get trapped in a vicious circle.   

One of these critics is Kurt Bayer, former Board Director at the World Bank. In a commentary published in the newspaper Der Standard, Bayer stressed that compensating enterprises and households with financial aid would be costly and inefficient as the problem itself would not be solved. 

READ ALSO: Austria to drop all Covid restrictions by the end of June

With such a compensation policy, he sees strong parallels to the strategy applied during four lockdowns in the Covid pandemic. Austria’s Covid management, especially its testing scheme, has cost more than €4 billion while health experts confirm that Austria hasn’t gotten through the pandemic any better than other EU countries that spent less money.

Bayer insists that inflation compensation has only increased consumer demand so far and will not make prices drop again soon. He also adds that certain corporate subsidies are climate damaging. 

The Klimabonus was also be sent via €500 voucher. (The Local)

Austria’s government against the 'Iberian model'

Bayer prefers what has been called the “Iberian model”, a price reduction and price control mechanism successfully applied in Spain and Portugal. Energy specialists from the Austrian Energy Agency conducted an “Empirical Analysis of the Iberian Price Cap” in December 2022. Austria’s Chamber of Labour now demands a state intervention strategy by implementing energy caps across the European Union. It refers to the findings of two research studies claiming that Austria's inflation could be reduced by at least a quarter. 

READ ALSO: How could Austria’s new electricity price brake benefit you?

The ÖVP-Green government coalition refuses state intervention and opposes energy caps, claiming that this would only increase energy consumption. 

The government remains less optimistic about other control mechanisms, as well. Austrian Labour Minister Martin Kocher (ÖVP), for instance, emphasised the importance of maintaining market competition. He says a “low price guarantee” on groceries, like in France, could cause supply shortages. 

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Inflation crisis has strongest impact on elections

With the ongoing inflation crisis in Austria, the number of angry citizens who feel left alone by the government and choose protest votes is growing. In the January elections in Lower Austria, the right-wing FPÖ came out as a winner with almost 10 percent of votes gained compared to five years ago. The nationalist party is now a junior partner of the ruling ÖVP in Lower Austria. 

READ ALSO: Why it really matters who the new governor of Lower Austria will be

In Carinthia, where elections took place at the beginning of this month, the ruling SPÖ lost 9 percent of their voters. This comes as a surprise because, in times of inflation and financial instability, the Social Democrats historically gained supporters. However, internal struggles in the SPÖ have damaged the party’s popularity and driven voters to the FPÖ, a traditional right-wing protest party. 

Analysts agree that the key motivation in the elections was the high inflation in Austria. People with lower income and those who can hardly make ends meet tend to vote for SPÖ and FPÖ, according to a SORA poll

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Other reasons for so-called “protest voters” were dissatisfaction with the health system and anti-Covid measures (including a mandatory Corona vaccination law that was scrapped after waves of protest last year) and, to a lesser degree, migration and asylum policies. 

READ ALSO: Why is support for Austria’s far-right FPÖ rising?

On April 23rd, federal elections will be held in Salzburg. A recent poll predicts moderate losses for the ÖVP and an increase for the FPÖ compared to the Social Democrats. 

Surprisingly, the survey doesn’t rule out that the Communist Party could enter parliament in Salzburg. This would be another clear sign showing the loss of confidence in a government still struggling to control inflation in Austria.

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Stefan Haderer is the author of the book “Perspektivenwechsel: Beobachtungen im Jahrzehnt des Wandels 2011-2022” (KPD 2023), a compilation of his political analyses published in the Austrian daily “Wiener Zeitung”.

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