Paul Krugman: “Stating the Obvious”

“Absolutely absurd,“ stated Josef Pröll, Austria’s Finance Minister of the conservative ÖVP on Apr. 15 when confronted with the controversial remark by 2008 Nobel Prize Laureate and Princeton University economics professor Paul Krugman with regards to the possibility of Austria’s bankruptcy.

Krugman’s provocative statement with regards to the impact of the financial crisis on Central and Eastern European countries (CEE) at the Foreign Press Club in New York on Apr. 13 sparked high-profile responses and anger in Austria.

When responding to the question of high exposure of Eastern European debt by Austrian banks, and whether that might lead the country into bankruptcy, Krugman responded directly.

“Now it’s a tiny one, it’s Iceland, but that just shows that it can happen, even to advanced countries. Ireland looks pretty bad because of large financial exposure. And Austria would probably be my third candidate in those leads.”

And the New York Times columnist delights himself in his blog two days later of having created a stir by just stating the obvious.

Evidently, Krugman’s comment has revived a debate of the past month when media reports, such as by the Austrian daily Die Presse (‘When, exactly, will Austria go into bankruptcy?’), circulated, sparked by concerns of high account deficits in the CEE countries.

Austria’s banks (not including Bank Austria and Hypo Alpe Adria as foreign-owned), Pröll clarified, have lending exposures in the CEE area of about EUR 200bn – approx. 70% of Austria’s GDP – but they are apposed to savings deposited of 85% of that amount.

The Finance Minister also dismissed the scenario of a complete deficiency of lending, but rather estimates that 10% might have to be bailed-out. The latter seems inevitable, as the European Bank for Reconstruction and Development (EBRD) estimated already in February 2009, that bad debts are likely to exceed 10% of lending in the CEE countries.

Indeed, the severe financial troubles of Austria’s neighbours highlights the huge investment Austria’s banks did since the 1990s in the CEE countries. They are the exposed of all financial institutions invested in the area, led by Raiffeisen with 54% of its risk-weighted assets, and Erste Bank Group (38%).

Evidently Josef Pröll set off for a ‘face-list’ trip to Bulgaria, Romania, Croatia and the Ukraine in mid-February promoting the Austrian government’s proposal for a financial stability pact for the CEE countries.

However, Pröll’s good-will tour sparked fresh concerns for the Austrian financial sector. The Romanian online business magazine Wall-Street consequently titled on Feb. 17 ‘Romania can drive Austria to meltdown.‘ At the same time, Austria’s daily Der Standard estimated that 10% failure of CEE lending would lead to crash of the Austrian financial sector.

Not surprisingly, the rescue plan failed to convince the other EU members, as it seemed motivated by Austria’s self-interest only.

Krugman’s pointed comment therefore, might be exaggerated as Austria’s bankruptcy seems unlikely at this stage, but has a valuable point: The European governments should not dismiss nor underestimate the effect a widespread financial collapse of financial institutions inevitably has when the CEE countries are not stabilized.

If this part of the financial crisis is mishandled, Daily Telegraph columnist Ambrose Evans-Pritchard predicts a “debacle (that) is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung.”

Austria would then certainly play the leading role.

A Clear Parliamentary Majority Needed – But What For?

The Current Austrian Political Crisis can be Solved by Changing the Electoral System, Conservatives Argue – News Analysis

Photo: Proponents of the Initiative Mehrheitswahlrecht at a press conference at Presseclub Concordia, April 24, 2008. Heinrich Neisser seated in the center.

Throughout April and May 2008, some of the predominantly Conservative Austrian political elite, led by the Initiative Mehrheitswahlrecht (Initiative Majority Voting System) and its chairman Heinrich Neisser and ventilated by the Conservative daily Die Presse, reopened a public debate with a proposed change of the Austrian electoral system for general elections.

Ever since the country has a new Grand Coalition between the Socialdemocrats (SPÖ) and the Conservative ÖVP since January 2007, critical voices not only from its opposition but also within both parties voiced their doubts on the effectiveness of the current government, which regularly seems to disintegrate and at the verge of collapse.

Neisser, former Conservative MP and Second President of the Austrian Parliament, as well as other influential proponents of the committee, including former ORF General Intendant Gerd Bacher, Socialdemocratic Historian Norbert Leser and Profil-Columnist Peter Michael Lingens, believe that a clear parliamentary single-party majority is essential for a stable government, able to tackle the critical problems, like healthcare and pension reforms, or a the overhaul of the Austrian Constitution.

The current grand coalition government, led by Chancellor Alfred Gusenbauer (Socialdemocrats) and Vice Chancellor Wilhem Molterer (Conservatives), though supported with a large parliamentary support of almost 70% – the SPÖ gained 35.3 % and ÖVP gained 34.3 % of the votes in the October 2006 General Elections and jointly they are able to push though constitutional changes for which a 2/3 majority is needed – however, in the eyes of the Initiative, it has not seriously touched on any of those projects so far since in power in January 2007.

In a press conference, held at the Presseclub Concordia on April 24, Gerd Bacher referred to the government’s overall performance that “within the history of quadriplegic grand coalitions, the currently is the worst of its kind.” Consequently, the proponents blame the current situation on the electoral system, which brought, in their view, no clear a result, but instead limited coalition options, forcing parties from the contrary political spectrum into one government.

Therefore, the Initiative strongly proposed for the proportional electoral system to be abolished and a voting system based on personal representation, as in the United States or Great Britain, should be introduced.

The Initiative’s manifesto, published also on the Internet, states that they aim for the realization of a “personality oriented and minority-friendly majority voting system” by which all five political parties represented in the Austrian Parliament today would still be present. However, there is no specific reference as to how this “protected species regulation” for the smaller parties, as Gerd Bacher provocatively termed it, should be realized in practice.

“It is important that all parties, whether useful or not – and in my understanding most are, however, useless – remain (in Parliament),” he added.