Tiny Austria Retains Role As Gateway to East Europe

THE Iron curtain has risen. The Berlin Wall has come down.

Yet even as the former East bloc opens up to increasing outside economic ties, Austria remains an important crossroads between two Europes.

"During the cold war, Austria had a certain function as a gateway to the East," says Helmut Kramer, director of the Austrian Institute of Economic Research in Vienna. That role stemmed in part from Austria's neutrality imposed by a cold-war treaty.

Austria has lost this exclusive edge, but Dr. Kramer says the nation's "familiarity with the East, with the way they do business, gives Austria and especially Vienna a comparative advantage."

The nation sports a roughly $3 billion annual trade surplus with Eastern Europe, an improvement on the even balance posted prior to 1989.

Opening of the East meant a stream of cheap labor into Austria, too, says Josef Christl, chief economist at Creditanstalt Bankverein in Vienna; this reduced "rigidities" in the Austrian labor market.

Meanwhile, Austria has been looking westward as well. A year ago it formally entered the European Union (EU).

In many ways Austria is an ideal candidate for such a group: It has a highly developed export-oriented economy that desperately needs markets beyond its own small domestic one. In return for membership and thereby access to those larger markets that its needs, Austria must open its own doors to competing producers from big countries like Germany and France.

This challenge has not been severe for manufacturers, since Austria had an agreement for free trade in goods with the EU for years before full membership.

But for service firms the transition is tough. In 1997, Austria will have to allow outside broadcasters in to compete with its state-owned ORF monopoly, for instance. And little Austrian Airlines, already having to trim jobs, may not be able to survive as an independent entity. Swissair, based in neutral, non-EU Switzerland, has been looking to Austrian Airlines and financially troubled Sabena, the Belgian airline, as potential merger or acquisition targets, Kramer says.

Another service sector in "critical" shape, according to Mr. Christl, is tourism. This has to do with the strength of the schilling rather than EU membership, however. This sector typically accounts for 10 percent of Austrian gross domestic product. The strong schilling is not only keeping some foreign visitors away, it's enticing more Austrians to travel abroad, says Christl. Both trends contribute to Austria's current-account deficit.

Austria's EU membership is also causing difficult economic transitions. Christl sees the economic situation as "manageable," but only if the government is able to rise to the challenges before it.

The country has just been through parliamentary elections precipitated by the inability of a grand coalition government to agree on an austerity budget that would let Austria meet the "convergence criteria" for the planned European Monetary Union.

The conservatives, junior partners in the coalition, had insisted on spending cuts. But voters, with one eye on France's austerity-induced labor chaos, endorsed a more moderate approach to trimming social benefits, turning to Chancellor Franz Vranitzky's Social Democrats.

It's not clear, though, that "moderate" is going to do the job. The conservatives lost "because they spoke the truth too clearly," says pollster Wolfgang Bachmayer of the research firm OGM.

Though Austria's ties to the east are an economic boon, there are challenges on that front, too.

Much of Austria's trade used to be with large state-owned industrial concerns in the Soviet Union and Warsaw Pact countries. Demand for Austrian steel-production technology, once a leading export, has fallen away because of overcapacity in the former Soviet Union.

Austrian firms still sell oil-field equipment to the east - notably in Kazakstan. And overall, Austria retains its strength in high-value capital goods - specialized manufacturing machinery and other mechanical (as distinct from electronic) equipment.

Consider, for example, Plasser & Theurer, a privately held firm that is thought to be the most profitable industrial company in Austria. It produces railroad-track maintenance machines that sell for about $2 million apiece but can save 90 percent of the cost of "manual" track maintenance. As the financial picture in East European nations brightens, they are eager to improve long-neglected railroads.

However monolithic the eastern bloc once might have appeared, Vienna has become more involved with some of its neighbors than others.

Hungary, until the end of World War I part of the Austro-Hungarian dual monarchy, receives half of Austrian foreign investment. The Czech Republic likewise looms large for the Austrian economy - for similar historic reasons. Analysts see the former Yugoslav republics of Slovenia and Croatia as possibly interesting to investors as well.

But Poland seems, from Vienna, to be in more of a German and Scandinavian sphere of influence. And Slovakia, with its capital but an hour away from Vienna, has been moving to restrict the rights of its Hungarian minority, and this troubles Austrians.