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States Trade Austria

In the year 2004 the European Union made a big enlargement step towards East and Central Europe. Eight new countries, most former communist states became part of the system of the European Union and its trade and economical policies. Especially member states in the eastern region of the EU 15 like Austria were promoting this new enlargement round. The goal was to achieve a win- win situation for both new member states and former EU countries.

It is doubtable if it is really a win- win situation for all EU countries but for sure the countries in the eastern sphere gained for the enlargement. In this paper I will focus on economical policy fields like the labour market and productivity, the GDP growth, inflation and exchange rates, furthermore on foreign trade and FDI, related with the enlargement of 2004. Till today is the GDP of the new member states low and under the average of the former EU 15 states. But even with their small GDPs brought the new member states a new dynamic into the European economy and all of them could increase the GDP.

Additionally to this there are some other impacts related with the enlargement. For example the EU reform agenda and the EU external policies got complete new impacts like the relationship to Russia. Although experts expected after the enlargement in 2004 a big increase of the economy of the EU 15 the growth rate was not very impressive. But compared with the years before (2002 and 2003) was the growth rate better and had positive impacts also on the New Member States.

The growth rate of Austria was not significant different to the growth rate of the other member states at this time. What was interesting that at this time other countries in Europe (but not EU members) had a fast growth rate, all so called transition countries, especially Russia but as well Rumania and Bulgaria. This was connected with a positive impact on the growth rate of the New Member States. But there were further reasons for the growth acceleration of the New Member States and their economies.

The weakening of the US dollar compared with the Euro had in 2004 a positive impact on the economical situation. The imports and exports of the New Member States were done in Euro, while on the other hand the costs for gas and oil were quoted in Dollars. The weak Dollar helped therefore to temperate the effects of the high prices for energy on the world markets. Also an important factor was that the raising demand for materials like steel had positive effects on the economic of the New Member States.

Nearly all of these countries had remarkable steel and raw materials industry. In most of the New Member States which are neighbourhood countries of Austria, had in the year 2004 a significant higher GDP growth rate than in the years before. Also the Austrian growth rate accelerated in this year. One of the reasons for the growth of the GDP in the New Member States therefore was the expanding of gross fixed capital formation (investment for brevity). (see table 1)

In nearly all countries of the New Member States, the growth of investment accelerated. The contribution of rising investment expenditure to total effective expenditure (effective demand) – and hence to actual GDP growth recorded – depends notonly on the magnitude of the rate of growth of investment. One also has to allow for the ‘base’, i.e. the investment’s share in the GDP.

But also other parts of the GDP like export, import and consumption are concerned by these factors of the GDP. It is difficult to state if the foreign trade in goods and non factor services had positive shares to the GDP or not if the dues of export and import are abstracted.

The table shows that the origins of the growth are different when we focus on the countries. Total consumption was in all countries (in 2004) a significant factor for the GDP growth. If we look on the fixed investments we can see that Poland and Slovakia had a weak investment growth. Most of the New Member States had also here a good development. Nearly all countries had negative contributions of foreign trade.

The differences are quite high if we compare the numbers of the countries. The factor of the foreign trade reduced in 2004 the real GDP in nearly all of the New Member States. This could imply that the growth of the GDP of the New Member States was mainly created by domestic demands. Compared with Austria, the growth of foreign trade was positive. It may be possible that if the EU 15 had a worse development of their contributions to the GDP, than the situation of the New Member States would have been even worse regarding the foreign trade factor.

Scientist think, that the membership of the EU has also positive impacts on the development of the GDP of New Member States. What is important to note is that the New Member States did not have a synchronized economical policy or similarity even when most of them were former communist systems. Business cycles are still weak developed.

Industry gathers strength

After the fall of the Eastern Block the New Member States had to make significant reforms in their industrial sectors. Beside the reforms remarkable inflows of foreign direct investment were necessary. Both factors were crucial for the access to the EU. While production rates were rising the number of employment especial in the industrial sector was decreasing. Reasons can be seen in the reforms of the production in the industrial sector which had negative impacts for the employment rate compared to the former industrial system.

The industrial performance in the years between 2000 and 2004 increased about 25%. Compared to the early 90ties in some of the New Member States the industrial performance increased even about 60%! (see table II) Also the labour productivity increased significant (Table 3). The shift of the reformation of the industries in the individual New member States was conducted by a further specialisation in the production. (like steel, electric products, etc.) In 2004 there was a further rise of industrial production for the New Member States which can be seen due the EU membership.

But beside the growth of industrial output was the number of employment declining. The labour productivity was increasing as well while there was just a slightly growth on the wages and unit labour costs declined. During the year 2004 the growth of labour productivity flattened while the unit labour costs were raising contrast to Austria. Due continuing inflows of foreign direct investments, a stable growth of industrial output occurred but less strong than in 2004. Because of continuity in the employment policies and economical policies the industrial competitiveness of this east region is increasing and attractive for investments. The only risk for these countries could occur when their currencies get dramatically upgraded.

Labour market situation remains precarious: ‘jobless growth’ in NMS

It became significant for the New Member States that their GDP and industrial growth was boosting while there is no significant growth in the employment rates. There was a small increase in services but big decline in industry and agriculture. While in Austria and most other EU 15 the employment rate was increasing the losses of jobs in the New Member States got higher. If we focus on the Lisbon strategy of the EU and the factors that upgraded competitiveness and high employment growth are crucial, than the New Member States are facing a big challenge.

For the New Member States it is difficult to focus on both aims, high productivity and high employment. To promote both goals at the same time is challenging for the New Member States. The productivity of the New Member States is significant under the average of the EU 15 but their unemployment rate is some cases twice high. It is not expectable to have significant employment growth outside the service sector in the following years. This has big impacts for the welfare system as well.

The danger is that in case of a decline in the productivity growth and industrial output especially in a regression connected with high unemployed numbers can lead to an increasing gap between the EU 15 and the New Member States. The high unemployment numbers are as well a challenge for EU 15 countries like Austria which are close connected to the New Member States. Special regulations should prevent a complete job migration. Further challenges for the New Member States are the different domains in their unemployment rates. While some sectors suffer from a lack of qualified personals classical job sectors like agriculture or industry are complete overrun.

A decline by the unemployment rate of young persons can only be reached if there is a change in the educational and job training system. There is no significant improvement expected for the most of the New Member States in the following years. If we compare Austria especially the eastern part, so the border regions with the New Member States than the differences are even more significant on the regional level. The regional GDP in Austria is higher than in the New Member States. It is interesting that the border regions in the New Member States to Austria are having the highest wealth while it is in Austria complete vice versa. There the regions which are bordering to EU 15 countries like Salzburg or Tyrol are having much more higher wealth than the east border regions.

The long developments after the WWII in the divided Europe till the fall of the Iron Curtain influenced the border regions more than since the entry of the New Member States into the EU. The regional differences are connected with differences in the employment sectors. The developments of the service sector are depending on the regional situation and incomes. The share of services in Austrian border regions is much higher than in the New member States. While in Austria the service sector in the border regions employs up to 60 % the manufacturing industry is quite low. This situation is complete vice versa in the New Member States.

The reason therefore is that in the border regions to Austria due the fact of low labour costs, industry increased as well the inflows of foreign direct investments. While in Austria the Eastern and Southern border regions suffer from a weak industrial situation and the service sector is the biggest employment factor the New Member States have a lack of jobs in the service sector. Due the entering of the New Member States into the EU and both sides could profit in the border regions of this diversity and local markets got upgraded. Nevertheless the Austrian border regions have still higher employment rates than the New Member State.

But the employment situation between the different border regions differs as well. The employment situation between the Austrian and the Hungarian border regions could develop positive while the situation in the Austrian and Slovakian and Czech regions got worse. The reasons therefore was if the border region was more industrialized or more agriculture. The agriculture industry declined in all New Member States and in Austria as well. The service employment situation developed positive in all border regions to Austria but just in the Austrian Hungarian border region was this development significant enough to better the overall job situation. Tourism in this area could be responsible for this strong development in the service sector in this region.

Booming foreign trade

The New Member States improved their foreign trade potential. Especially in the year 2004 there was compared to previous years a boom. The entry into the EU could have been the positive impulse for this boom which was about an increase of 20% in this year for external trade. Also the import increased significant and the highest results could be achieved in the regions trade. Some of the New Member States could balance their trade deficit quite significant and the sum of the trade deficit in 2004 of all new Member States decreased slightly.

The effect of this trade boom had quite positive result for EU 15 countries. The increase of the export of the New Member States can also be seen as a sign of the new strengthened industry. With this boom happened an upgrade of the currencies of the New Member States. About 80% of the New Member State exports are inter- EU trade. The liberalisation and the openness of their economics and industries fostered the fast trade integration and had big impact for the whole EU. See table 5

The main trading partners of the New Members States are the EU 15 countries and the increase of exports of the New member States outbalanced 17% in 2004 which is significant higher than in 2003. On the EU market was a demand for products from the New Member States and with the accession the new countries could easier get further market shares on the European market. The boom in trade with the EU especially with the Euro zone resulted in a further growth effect for the New Member States. With the entry to the EU the aquis comunitaire had to be accepted. Imports had lower tariffs and former trade barriers were abolished. This might be the result for the trade and growth boom in the year 2004 of the New Member States. This can be seen at table .

The liberalisation and boom in trade of the New Member States had also effects on Austria especially in the commodity situation of the Austrian trade with the eastern neighbours (table 8a). While Austria had a decrease in the trade of pharmacy products with the EU 15 countries the trade surplus with the New Member States was extra ordinary high. The Austrian pharmacy industry had a trade surplus of about 25%. But this increase of trade differs between the Austria and the New Member States. While the there was an increase in trade with Slovenia, the trade of these products with Hungary declined. The reason therefore could be if the countries had an own strong pharmaceutical industry which gained profit from the accession or not. As mentioned before the removal of trade and tariff barriers related with the entry into the EU of the New member States had also impacts for Austria.

This could be significant seen when we focus on the increase of food export. Also here was a decline of the trade with the EU 15 but a high increase due liberalisation in trade with the New Member States. Austria also gained trade profits in the fields of machinery and transport equipment. Looking on this table it becomes clear how much Austria gained from the accession of its eastern neighbours into the EU. What is interesting that while Austria had a rise in export trade of pharmacy products with the New Member States also the import of cheaper pharmaceutical products into Austria increased significant. The only region in the EU where Austria gained a trade surplus was the region of the New Member States. The foreign trade with the EU 15 declined. The trade with the New Member States is essential for Austria especially because the trade deficit is reduced on just a few goods and raw materials.

A similar situation happed in the domain of service trade where the trade with the EU 15 decreased. In 2004 Austria could increase its trade with service exports with the New Member States especially with its direct neighbours. The export of service was slightly higher that the import. The most important service goods in the trade between Austria and its neighbours are travel, business services and transportations. Very important is the increase of export in financial services. Austrian banks and insurance companies are one of the biggest winners of the accession of the New Member States.

Due its geographical and historical situation Austria is especially in domains of the service trade a platform from east to west and vice versa. The accession of the New Member States effects much more the trade of service than the trade of goods due the fact that barriers in the trade of goods were removed in parts already before the accession. While service trade with the EU 15 was declining, Austria gains big profits in the trade of services with its eastern neighbours.

The Austrian Bank and insurance system could hardly exist with the big banking or insurance organisations in Western Europe. A specialisation on the Eastern and Southern European market especially in the areas of the former monarchy made this Austrian branch to the market leader in these regions.

Inflation, monetary policy and the exchange rates

The inflation in the New Member States increased in the year 2004 compared with 2003. The reasons were changes in the taxation especially on good like alcohol and tobacco towards an EU adjusted system. Furthermore higher prices on oil and raw materials leaded to a higher inflation. The liberalization of the food market in the New Member States caused an increase of prices and had therefore as well an influence on a higher inflation. But after the entry into the EU a deflation happened. Restrictive monetary politics of the central banks caused a stabilisation and strengthening of the New Member States currencies related to the Euro.

But nevertheless the current accounts of the New Member States are negative. The oversupply of foreign exchange was important for strengthening the currencies of the New Member States. But it has taken the forms of inflows of portfolio investment and foreign credits in 2004. A problem with high inflows of portfolio is that they are unstable and volatile. A change in the market can cause a fast devaluation and might have also negative impacts on the GDP. The risks with suddenly outflows of portfolio investment with a following devaluation were in the last years not predominant in the New Member States. But the nominal appreciation might have a negative effect on the trade.

Despite the good results in labour productivity and in unit labour costs, which could compensate the effects of appreciation, the overall trade balances of the New Member States were negative in 2004. If the exchange rates of the New Member States are going up further, this could have negative influence on the performance of the overall trade of these countries, especially if the wins for labour productivity and unit labour cost get worse than expected. Such effects would slow down the growth of the GDP in the following years and make a catch up of the New Member States to the EU 15 more difficult.

In nearly all New Member States was a high increase of FDI remarkable. This can be as mentioned above a sign that the accession opened new locations for investors especially form the EU 15. Estonia, Hungary and the Czech Republic were the main targets of investors in 2004. These countries have also the highest foreign direct investment stock per capita of the New Member States. Reinvested profits are the most important fact of these FDIs. Furthermore is the repatriated part of the FDI important and the costs of this imported capital can be seen.

Real estate, services and financial services contain about 60% of the stocks in the New Member States. The local market is an important fact and attracts many investors. With the accession of the New Member States a service shift was noticeable in Europe especially in countries like Austria which were at the east border of the EU 15. Several service companies and institutions were shifted into the New Member States. Call Centers, Car Rental Agencies or Logistic providers transferred their companies into the territory of the New member States. Manufacturing foreign direct investment in Central Europe experienced due the accession a change.

The upgrade of wages and the lowering of transaction costs due the accession are responsible for this process. Further causes are that labour intensive industry is leaving. What is interesting that there is an industrial concentration in certain regions noticeable. This process may increase. The iron curtain which had separated traditional economical and industrial regions caused depletion in the border areas. This process seems to be retrogressive due the fact that some tradition industrial areas especial in these border areas gain new momentum.

Austria is one of the most important FDI holders in the new Member States. Austrian foreign direct investments in 2003 were about 14 billion Euro in the New Member States. There is a clear concentration of Austrian FDI in the neighbouring countries. The investments were doubled from 2003 compared to 2004. The foreign direct investment from Austria went mainly into the service branch. 604 companies (61 percent) belong in this category (246 in trade, 172 in enterprise services and 112 in the credit sector). After a difficult period in the beginning of the 90ties nearly all Austrian investments generate high profits. To promote FDIs many of the New Member States are lowering the corporate income tax. Some experts state that this would not be necessary due the fact that production costs and tax burdens are generally lower in the New Member States.

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