Given its dependence on international trade, Austria has always been interested in some form of customs union. Although it was recognized that there might be some competitive disadvantages in such associations, especially with countries that produced at more competitive prices, the Austrian government and Austrian manufacturers have always been even more afraid of being excluded. They feared that exclusion would prevent them from reaping any economies of scale and would ultimately consign them to an economic backwater.

The government, therefore, was anxious to join in some form of European economic association as several organizations were being shaped after World War II. It could not join the European Community (EC) as it was being formed, however, because of fear that this would violate the 1955 State Treaty prescription for neutrality. The member states of the EC called their organization the Common Market when they created it in 1958, but they made it clear from the beginning that it had a political as well as an economic purpose. Under those circumstances, Austria had to hold back as long as Europe was divided by the Cold War.

However, such considerations did not prevent Austria from joining the European Free Trade Association (EFTA--see Glossary) when it was formed in 1960. EFTA was a purely economic association, and its members included Finland, Sweden, and Switzerland, all neutral states that were not members of the North Atlantic Treaty Organization (NATO). Moreover, EFTA had no intention of becoming anything more than a trade association. EFTA was far from an ideal trading arena for Austria because most of its members were located on the periphery of Europe. EFTA countries came to account for less than 15 percent of Austria's trade, while 66 percent of its foreign trade was with the EC countries.

EFTA, however, did have a very important specific advantage from the Austrian standpoint because it did not require common tariffs. Thus, Austria could retain some control over the conditions under which its foreign trade operated, while expanding its close commercial links with a number of EC states (even as it remained formally outside the EC).

Austria attempted to obtain associate status in the EC despite the political barrier to full membership. As it became clear in the 1960s that some EFTA members, such as Britain, were beginning to edge toward EC membership, Austria began its own negotiations to obtain a special arrangement with the community. In 1972, after ten years of negotiations, Austria and the EC reached an agreement providing for a gradual lowering of tariffs to zero. Austria nonetheless remained outside the EC Common Agricultural Policy (CAP).

The Austrian government applied to join the EC in the summer of 1989, as the Soviet empire was crumbling and Moscow was no longer either disposed or able to use the neutrality restrictions of the State Treaty to bar Austria from membership. Like other EFTA states, Austrian officials agreed in 1991 to the formation of the European Economic Are68 Area (EEA) between EFTA and the EC as a preliminary step, but it also wanted to join the organization on its own.

Although Austria will probably not be able to join the European Union (EU)--as the EC came to be known in November 1993- -until 1995, by which time the Single Market should be well advanced, the government has taken steps to begin adapting the economy to EC standards. Along with adopting many EC laws and regulations through the EEA in 1991, the government has adopted a number of additional EC rules, including those governing the freedom of capital flows. These measures have been taken to ensure that the social partners and the economy as a whole would not be at a disadvantage when Austria becomes an EU member.

Under the terms of the agreement reached at the EC summit at Maastricht in December 1991, Austria's membership in the EU will also lead to membership in the new European Monetary Union (EMU) if Austria can meet the convergence requirements by 1997. These requirements include a number of features: an inflation rate within 2.5 percent of the three lowest in the EU long-term interest rates within 2 percent of the three lowest rates a government deficit below 3 percent of GDP and a public-sector debt of less than 60 percent of GDP. As of 1993, Austria was able to meet these requirements, but there is no guarantee that that will be the case in 1997.

Austria tied the schilling to the deutsche mark in the 1960s, largely because the country could not function without a predictable exchange rate with its largest trading partner, West Germany. In part to reinforce that linkage, Austria joined the EMS and its ERM in 1979. This membership has meant that Austrian interest rates have matched those of the Bundesbank and, as a result, to all intents and purposes have been set in Frankfurt. Therefore, Austrian adherence to the EMU would be a logical extension of long-established policies, and Austrian currency would become whatever the EMU adopted, whether it is called the European Currency Unit (ECU) or the Euro-Mark as some have proposed.

The link to the deutsche mark has had a major advantage for Austria in that it has given the country a long period of low inflation and the kind of monetary stability that those who suffered through the terrible inflation of 1921-23 well appreciate. It is, however, also a disadvantage for Austria's international competitive position. Goods denominated in schillings, like goods denominated in deutsche marks, cannot count on any sales increases because of devaluation of the currency. In fact, the schilling has consistently increased in value since the end of the Bretton Woods fixed exchange-rate era in 1971. It has generally moved with the deutsche mark vis-à-vis the United States dollar.

Data as of December 1993