Austria's hills are alive to the sound of money

In the first of a series, Tony Barber looks at problems posed by the EMU

At first glance, Austria seems a leading candidate to participate in the single European currency scheduled for launch in January 1999. Austrians enjoy one of the world's highest living standards, inflation is low, and the schilling has remained fixed to the German mark for a decade while other European currencies have fallen by the wayside.

Yet this happy picture is deceptive in several important respects. Austria's government, a coalition of social democrats and conservatives, collapsed last October over how to reduce the budget deficit, forcing a general election next Sunday.

Like a majority of European Union members, Austria faces a difficult battle to meet the 1999 deadline and bring down its deficit to 3 per cent of Gross Domestic Product, the level stipulated by the Maastricht treaty for countries hoping to be part of monetary union. According to a study by economists at Salomon Brothers, Austria's deficit will be 5.5 per cent of GDP this year - higher even than in France, where budget-cutting measures have provoked widespread social unrest.

Moreover, Austria's public debt, at a projected 68 per cent of GDP this year, is above the 60 per cent required under the Maastricht terms. The 1999 deadline means that the next government will have to make some fast and painful decisions if Austria is to qualify for monetary union. Wolfgang Schussel, the leader of the conservative People's Party, insists that radical cuts in pensions and welfare payments are the only way forward. "I am not sure Austria can and will reach the criteria for monetary union,'' he said. ''That is the main reason we are having elections."

An attempt to introduce such cuts could have a significant impact on Austrian perceptions of the EU and on the domestic political scene. Austrians voted for EU membership by a two-to-one majority in a June 1994 referendum, but the honeymoon is definitely over.

Recent polls suggest 60 per cent of Austrians now consider it was a bad move to join the EU. As for monetary union, 54.5 per cent oppose giving up the schilling for the single currency and only 38.6 per cent support it.

There is clearly a risk that these levels of disillusion and scepticism will rise if Austria's next government imposes austerity measures that the general public associates with an attempt to participate in monetary union. The most obvious beneficiary in political terms would be Jorg Haider, the far-right leader of the Freedom Party, who has denounced the planned single European currency as a fraud. Support for Mr Haider's party is running at about 25 per cent, compared with 31 per cent for the Social Democrats and 30 per cent for the People's Party.