SKOPJE, Macedonia, Nov. 26 (UPI) -- The bulk of Austria's $400 million in overseas development aid goes to Eastern Europe. It is a founding and funding member of the $33 million Southeast Europe Enterprise Development initiative, led by the World Bank's International Finance Corp. and intended to foster the formation of small and medium-sized enterprises in the region.
Austrian companies make it a point to participate in every trade fair and talk shop in the Balkans and in Mitteleuropa alongside firms from Macedonia, Bulgaria, Albania, Croatia, Bosnia-Herzegovina, Hungary, Slovenia and Romania.
Austria initiated the Central European Initiative -- the largest regional cooperation effort involving Austria, Italy, Hungary, Yugoslavia, the Czech Republic, Poland, Bosnia-Herzegovina, Croatia, Slovenia, Slovakia, Macedonia, Belarus, Bulgaria, Ukraine, Romania, Albania and Moldova. A flurry of memoranda of understanding, pledges, contracts and programs usually follows these encounters.
In a 1998 study titled "Austria's Foreign Direct Investment in Central and Eastern Europe: 'Supply Based' or 'Market Driven?'" by Wilfried Altzinger of Vienna University of Economics and Business Administration, the author concludes:
"Since 1989 Austria's investment activities in Central and Eastern Europe have intensified. Investments are concentrated in adjacent countries. Geographical proximity and close historical and cultural ties have enabled even small and medium-sized Austrian enterprises to achieve a 'first mover advantage'.
"Investments have been performed to a large extent in industries that are typically not connected with outsourcing activities (trade, finance and insurance, construction).
"Market-driven factors and strategic considerations are the ultimate objective of these investments. Only a few sectors, in particular a so-called 'core' industrial sector (metal products, mechanical products, electrical and electronic equipment), indicate that low labor costs are of importance. Trade and sales data of the affiliates support the dominance of the local market.
"Whilst on average 66 percent of the affiliates output was sold locally, this share was only 39 percent for the 'core' industrial sector. This sector indicates particular patterns of relocation. Nevertheless, until now this part of Austria's FDI has only been of minor importance."
Austria recently signed with the governments of the region a memorandum of understanding on cooperation in renewable energy resources. It is involved in the E75 motorway project, which links the country to Greece through Macedonia. Despite the fact that Russia's debt to Austria of more than $3.5 billion is long overdue, bilateral trade is expanding briskly. Austria is a member of the Danube Cooperation Process centered on the economic and environmental issues of the 13 riparian signatories.
Croatia opened last June a trade chamber in Graz. The Croatian banking sector is completely Austrianized. Austria's energy company OMV, is bidding for Croatia's energy behemoth, INA. Even destitute Albania signed a trade cooperation agreement with Austria, replete with specific projects of infrastructure, telecommunications, food and tourism.
Austrian exports amount to half of its gross domestic product. Around 50 percent of Austria's trade is still with Germany, Italy and the United States. But Hungary has overtaken Switzerland with 4 percent of all of Austria's exports. Trade with central and Eastern Europe is growing by leaps and bounds while lethargic Germany's share declines, though, at this stage, imperceptibly.
Many Austrian companies -- especially in the financial sector -- are actually Central European. Erste Bank -- Austria's largest network of savings houses -- retains three people outside Austria, in places like the Czech Republic and Croatia, for every one employed at home. It also derives most of its net operating profit from its Central and Southeastern European subsidiaries. Margins in over-branched Austria are razor-thin.
Austrian banks act as both retail outlets and investment banks. Bank Austria, for instance, purchased stakes in Croatia's Splitska Banka and Bulgaria's fourth-largest financial institution, Biochim. It is bidding for Romanian and Albanian banks. But it also lent aggressively to Bulgaria's second mobile phone operator, GloBul.
Meinl Bank will advise the Macedonian government in its privatization of the debt-laden and inefficient electricity utility. Raifeissen Zentralbank Austria is heavily involved in lending related to fossil fuels in Romania and elsewhere.
It is here that the danger lies. Austria's financial sector is over-exposed to Central, Eastern and Southeastern Europe in the same way that American banks were exposed to Latin America in the 1980s. The hype of EU enlargement, coupled with the almost-religious belief in the process of transition from communist drabness to middle class riches, have blinded Austrian banks to serious cultural obstacles, reactionary social forces and corrupt vested interests in the region.
Tellingly, Austria is not a member of GRECO -- the Council of Europe's Group of States against Corruption.
Should Eastern Europe implode, mutual guarantee pacts among Austrian financial institutions ensure that a run on a single member or the bankruptcy of a single bank will cascade throughout the financial system. Austrian banks maintain inadequate Tier 1 capital ratios -- 6 percent vs. 8 percent to 12 percent in other countries in the West. Their domestic businesses are often loss leaders. They are ill-equipped for a meltdown.
High financial gearing in the banking sector means that any government intervention is likely to result in a nationalization of the banks. Industrial cross-shareholding within financial-industrial complexes might entangle the government in a process of reverse privatization. Austria would do well to sprint less vigorously where others fear to tread.
Send your comments to: [email protected]
