A city on a lake in Austria

Austria Politics May 2019

Austria: “Ibiza affair” brings down Sebastian Kurz’s chancellorship

On 27 May, Austria entered unchartered political waters; for the first time in the country’s modern history has a chancellor (and his newly-installed technocratic government) been ousted from office by a Parliamentary no-confidence vote. Snap elections were already scheduled to be held in September after a corruption scandal broke in mid-May ending the coalition government between former Chancellor Sebastian Kurz’s People’s Party (OVP) and the far-right Freedom Party (FPO). Notably, the no-confidence vote comes one day after the OVP’s success in the European Parliament elections, highlighting popular support for his party despite recent events. Although it is still early days and the situation is in flux, it is therefore possible that the OVP will come out on top in the upcoming vote; however, it is unlikely that they will once again do business with the FPO. Overall, the economic impact of the turmoil is unlikely to be significant, and solid private consumption should buffer momentum this year—even if the proposed fiscal stimulus becomes more uncertain.

The most direct effect of the recent fallout is that measures previously agreed upon might fail to pass Parliament or might not be tabled before elections in September. Last month, for example, the coalition had planned to introduce additional tax relief measures until 2022 through lowering health insurance contributions; income tax; corporate tax; and raising the minimum pension level. While the immediate economic fallout is likely to be limited, a prolonged period of trying to form a new government could weigh on sentiment levels and drag on spending and investment.

Following the dismissal of Kurz’s government, President Alexander Van der Bellen is expected to appoint a new caretaker chancellor and government to watch the shop until new national elections are held in September. Inga Fechner, Austria economist at ING, noted that while the turmoil and the eventual installment of an interim government “won’t lead to sparks of joy from the economy, it should not be a dampener to our economic outlook for second and third quarter GDP growth. In line with our expectations, markets did not react to the motion of no confidence with Austria’s 10-year yield moving only marginally. Given sound public finances and solid economic fundamentals, the new political uncertainty should not have any impact for the time being.”

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