Austrian Experience with and Preparations for the Euro Conference Experience with and Preparations for the Euro Riga, 22 February 2013 Franz Nauschnigg Head of European Affairs and International Organizations Division Oesterreichische Nationalbank

Austrian Monetary policy/Exchange rate regime  „Austro-Keynesianism“ - A successful policy mix … „Hard currency policy“: Anchoring the ATS to the DM - stabilising price and exchange rate expectations and exerting discipline on economic policy Austria as shadow member of the EMS - ATS fluctuation against DM of less than 0.2% since 1981 Gearing fiscal policy towards full employment and a co-operative income policy (Social partners) - assisted by elements of growth oriented supply side measures

EU/EMU Preparations Capital movement liberalization -„Step by step approach“: Liberalize internally before liberalizing externally - start with Banks/companies/general public – allowing the Austrian financial sector to prepare for foreign competition both at home and abroad EMS crises 1992 – 1995 – weak EMS financial architecture overwhelmed by speculation – solution EMU - € protects against currency crises – Summer 1993 OeNB defeated speculative attack on DM peg In contrast to other countries (SWE, FIN, NOR) Austria experienced no financial crisis 1 January 1995: EU-membership, 9 January 1995: ERM-membership Maastricht criteria only problems in the fiscal field – founding member of EMU 1999

Growth friendly fiscal consolidation - Austria Growth friendly fiscal consolidation in Austria 1995 – 1997 central – socially equitable restrictive fiscal policy lowered deficit from over 5 % to under 2 % of GDP – Slogan Sparen ja - aber gerecht – make savings – but do so fairly Combining restrictive fiscal policy with supply and macro policies: Increasing the tax rate on interest income Lowering subsidies for saving (Bausparen) and linking it to interest rates using tax exemptions in the housing sector to give incentives to private sector to spend existing reserves Innovative expansionary package in 1996 nearly 3 % of GDP Shifting of public investment to the private sector A particular sort of public private partnership (PPPs) - creating private entities owned by the state – e.g. motorways ASFINAG,

EU/EMU membership – general assessment Additional growth through EMU membership for Austria - 0,4% of GDP annually (Study by Austrian Institute of Economic Research) EU/IMF Financing for CESEE helped Austrian Banks Vienna Initiative successful capital flow management EU and EMU membership has been generally beneficial for the Austrian economy! Austria-Switzerland: A different integration strategy contributed to a huge growth differential

Austria-Switzerland: Comparing economic growth

Financial crises – lessons from history Euro protects against currency crises - but now interaction of banking and sovereign debt crises in Euro area Since collapse of Bretton Woods System 1971 – worldwide increase in the number of financial crises IMF data for the period 1970 – 2011: –218 Currency crises –147 Banking crises – GDP losses – 32,9 %, increase in government debt level 21,4 % of GDP on average –66 Sovereign debt crises –42 double and 10 triple crises Associated with high fiscal and economic costs (especially when crises interact)

Capital Mobility and Banking Crises Quelle: Reinhart, Rogoff, This time is different 2009