The election of Waldheim had a large impact on Austrian domestic politics as well. After Waldheim's victory, Sinowatz, the SPÖ chancellor who had been perceived as ineffective, resigned, and the SPÖ turned to Franz Vranitzky to fill the top position. Vranitzky decided to dissolve the SPÖ-FPÖ coalition when the leadership of the junior party was usurped in September 1986 by Jörg Haider. Haider was prone to making controversial remarks about Austria's place in the greater German cultural identity, and Vranitzky had little hesitation in cutting the SPÖ's ties to the FPÖ under its new leader. This action led to a premature parliamentary election in November 1986. Pressures for an early election also came from the financial failures in the state industrial sector that had embarrassed the SPÖ-FPÖ government.

The outcome of the election was a shock to both major parties, as the FPÖ attained its highest vote total since 1953, receiving 9.7 percent. The SPÖ lost ten seats in the Nationalrat, dropping to eighty, and the ÖVP lost four, declining to seventyseven . After lengthy negotiations, in early 1987 the two major parties decided to form a grand coalition for the first time since 1966. Vranitzky remained chancellor, and Alois Mock, leader of the ÖVP, became vice chancellor and foreign minister. The two parties agreed to split the remaining cabinet posts, with the Ministry for Justice going to a person with no party affiliation. Former Chancellor Kreisky complained loudly about Vranitzky's giving the foreign ministry portfolio to the ÖVP, and he resigned as honorary chairman of the SPÖ in protest.

The new grand coalition was not able to function in the cozy way the old grand coalition had because media scrutiny was much greater in the 1980s than it had been between 1945 and 1966. Further, one of the coalition's top priorities was to address the problems in the state industrial sector and the budget deficit in general. The government carried out job cutbacks and early retirement programs at VÖEST-Alpine, the state-run iron and steel conglomerate, and also reduced subsidies to farmers. These policies hurt key interests of both parties' core constituencies, but ÖVP and SPÖ leaders saw little alternative to tackling these problems head on. Austrian politics had entered a new stage that was short on the optimism of the Kreisky era and focused on pragmatic and hard-headed solutions to economic problems.

The ÖVP-SPÖ government benefited from improving economic conditions, especially from 1988 onward. Economic growth for the years 1988-90 averaged around 4 percent annually. Other economic indicators were also positive, with unemployment averaging around 5 percent and inflation running at 2.5 percent. In the political realm, however, the coalition was plagued by numerous scandals involving primarily high-ranking officials of the SPÖ. In late 1988 and early 1989, two of these officials were forced to resign for large-scale tax evasion. Chancellor Vranitzky, who had replaced Sinowatz as party chairman in May 1988, initially was hesitant to firc08 ire his friend Günther Sallaberger, who had failed to pay taxes on S1.8 million (for value of the schilling--see Glossary). Pressure to remove Sallaberger became intense after party members were shocked to learn that he was an example of a trend in which holders of multiple posts within the SPÖ were actually earning more money than the chancellor.

An even larger scandal emerged when the SPÖ became embroiled in an insurance scandal centering on Udo Proksch, the notorious former owner of Demel's, Vienna's most famous coffee house and meetingplace for SPÖ bigwigs. A ship commissioned by Proksch, the Lucona, had sunk in 1977 with the loss of six crew members. Proksch claimed that the ship had been carrying a uranium processing plant, but documents describing the ship's cargo were found to have been forged, and Proksch was accused of deliberately sinking the vessel. The investigation into the affair moved at a snail's pace. By early 1989, a parliamentary committee that had been formed to look into the case began to focus on two leading SPÖ officials, Minister for Interior Karl Blecha and Leopold Gratz, the first president of the Nationalrat.

The committee's investigations provided some of the most dramatic political theater ever seen in the Second Republic. After tough cross-examinations of subordinate officials, the committee and the public began to suspect that Blecha had deliberately slowed up the Lucona investigation in the early 1980s. Blecha's denials of any wrongdoing were unconvincing, and Vranitzky forced him to resign.

Gratz, who had been foreign minister at the time the forged documents relating to the Lucona's cargo had arrived in Vienna, was suspected of even greater complicity in the affair. As the committee did its work, it appeared increasingly clear that Gratz had covered up important details of the affair to protect Proksch. Gratz resigned his position when, like Blecha, he had lost all support within the SPÖ. In the face of a very bleak ethical situation, Vranitzky could at least claim that he had acted relatively quickly to clean house.

Data as of December 1993