When I first started visiting the city of my father’s birth, the strongest impression I took away was of little old ladies sitting on park benches, appearing to await the return of the long-ago departed Habsburg emperors.
By mid-20th century, after centuries of running an empire that extended from Poland to Italy, Austria had been reduced to a country of 8 million people and the most remote outpost of non-Communist Europe. Its Cold War neutrality was enshrined in a treaty organized by the World War II victors who occupied the country until 1955. Beyond thriftily working their way to stolid prosperity, there was little indication that the country and its capital would ever return to anything resembling imperial reach.
But as suddenly as the Cold War ended in 1989, followed by Austrian’s 1995 accession to the European Union and the EU’s 2004 expansion into Central and Eastern Europe, Austria’s industries and banks have asserted a dynamic economic role in the old Hapsburg domains, from Hungary and the Czech Republic and Slovakia to Romania, the nations of the former Yugoslavia and as far away as Ukraine.
From a backwater, Vienna has become a geographic center of a bigger and newly united Europe. The economy boomed with profits from the east. Beautiful old buildings were restored to earlier luster, some housing elegant shops that now sell neckties for 130 euros. Instead of looking aged and gray, Vienna took on more attributes of the youth culture seen in other European capitals, visible in still smoky coffee houses and bars and at Friday night openings of galleries and museums sparkling with glamorous party-goers clad in black outfits. Restaurants became more international with sushi almost as available as schnitzel and boiled beef.
But as Austrians have learned in recent months, the rapid rise up in the east also carried risks that some analysts warned could bring down the country and its banks.
The initial success of the post-Cold War expansion was almost an accident, explained Thomas Wieser, an official at the Finance Ministry. Austrian industries and banks were able to steal a march on their much bigger and more internationally minded German counterparts who were preoccupied with the unification of their country.
“It was pure luck, not foresight,” Wieser said. “It happened because of Austria’s proximity to this (Central and Eastern European) market.
Among the key players was Erste Group, which operates out of the same Baroque headquarters in Vienna’s posh central district it has occupied since 1819.
As chief financial officer Manfred Wimmer noted, the once small retail savings bank jumped into the former Hapsburg territories (which became independent states at the end of World War I and which were subsumed in the Soviet bloc after World War II), buying up communist state-owned financial offices and basically offering millions of Central and Eastern Europeans access to modern banking services such as ATM machines.
“Less than half the population had bank accounts. There were low savings rates except in the Czech Republic and Slovakia. People did not have access to banking and credit,” Wimmer said.
There were nearly two decades of heady expansion for Erste Group (which now has 17.5 million customers in the region) and other Austrian banks. The normally conservative Austrians thought they were being prudent — no sub-prime mortgages or exotic instruments like Credit Default Swaps which came to imperil U.S. and British banks.
But it turned out that the Austrians, and other European banks, were playing one form of roulette — issuing and taking out home mortgages and consumer and business loans in lower-interest Euros and Swiss francs in the expectation they could be paid back in gradually appreciating local currencies such as the Hungarian forint.
But with the 2008-09 collapse hitting Europe, those economies and currencies plunged, and the Austrian banks started piling up more non-performing loans. Then outside analysts started looking at another statistic — that the foreign loans of Austrian banks had reached the equivalent of 70 percent of Austria’s gross domestic product, the highest ratio in the world. Nobel laureate Paul Krugman, in a meeting with European journalists in New York, warned of state insolvency, a potential Iceland, if too many of those loans turned sour.
And even though Austria still remains comparatively small on the European economic scale, the fear of bank failures there has historical resonance across Europe. In the late 1920s, the collapse of a major Austrian bank, Creditanstalt, was one of the triggers of the global depression.
“This city was very nervous,” said Eric Frey, managing editor of the Der Standard newspaper and an international political economy analyst. “But everyone was in a state of denial, blaming foreign speculators.” Briefly in 2009, the spreads on Austrian debt instruments shot higher than on those for historically improvident Italy.
With backing from international and European institutions, the Austrian government put together a 100 billion euro rescue fund, nationalized one bank and allowed two others to postpone and roll over debts to avoid bankruptcy.
The immediate crisis was averted; the Central and Eastern European economics are showing signs of slow recovery; the Austrian banks are returning to black ink. But the banks and government are still looking over their shoulder — for a double dip in the world economy, the still jobless recovery and most of all, a firestorm such as the one now hitting Greece and that could spread in a panic.
As Erste Group’s Wimmer said, neither bankers nor government officials can underestimate the impact of psychology in economic decisions.
“There can be spillover from one country to the other without any tangible reasons.” he said.
But in banking, business and government circles in Vienna, there is no thought of turning back, despite the recent scare.
“Our markets still have long-term growth potential,” Wimmer said. The growth rates will no longer match those of the past 20 years but still will be double those in Western Europe.
On the way out of Erste Group’s gracious headquarters, one’s eye catches a neighboring store that sells only Champagne. For the next few years, for Austrian banks and businesses, the Champagne will be on ice. But for a country and city that count history in multiple centuries, economic destiny is back where it has been since the 1500s.