Austria faces difficult government formation

Austria has voted. As expected, the ÖVP won the National Council elections by a considerable margin. However, the increase in votes to about 38.4% (official final result without postal vote) was somewhat higher than expected. After a break of several months, Sebastian Kurz is likely to become Austrian Federal Chancellor again. But the crucial question is: Who will be the new ally of the ÖVP?

After the surprisingly strong performance of the Greens, the ÖVP has three possible partners at its disposal: SPÖ, FPÖ and Greens. The ÖVP has the largest overlap in terms of content despite the affair and the previous coalition break with the FPÖ. In view of the now shifted balance of power, the ÖVP would also set the tone even more clearly in a turquoise-blue alliance. It is also clear, however, that voters are currently very critical of the FPÖ. Kurz believes that a relaunch of the old alliance would not be without political risk – especially if new details came to light in the context of the Ibiza affair. For its part, the FPÖ itself admitted its defeat on election night and made it clear that it does not regard its own result as a voter mandate.

Much more public sympathy would be gained if the two election winners, the ÖVP and the Greens, were to merge. However, before the elections the Greens had already formulated conditions that make it difficult for both parties to reach an agreement. After the much better than expected performance of the environmental party, their self-confidence is likely to be even greater. In the run-up to the election there had already been speculation about a possible tripartite alliance of the ÖVP, the Greens and the liberal Neos. Since the votes could now even suffice for a two-party alliance, Kurz should bow to the will of the voters and at least hold exploratory talks with the Greens. If the major differences in content between the two parties cannot be bridged, the ÖVP should be able to resume talks with the FPÖ. An alliance with the SPÖ, on the other hand, is rather unlikely after the Social Democrats have suffered a bitter electoral defeat and, moreover, the content overlap with the ÖVP is hardly greater than that with the Greens.

Despite a possibly lengthy search for a coalition partner, the ÖVP’s electoral victory, which at least ensures political continuity at the top of the government, is the first priority from a market point of view. However, the choice of a coalition partner is likely to have an influence on the government’s programme and thus on the country’s economic and fiscal policy. The Greens demand higher government spending for social and environmental purposes, among other things. If the ÖVP does not want to break its tax reduction promise, a compromise between Turquoise and Green would probably result in higher new indebtedness. However, the prospects of the Alpine republic achieving its best rating could then cloud over for the foreseeable future. If Kurz were to opt for an alliance with the FPÖ, it would probably be more likely to continue the government’s previous course, which was primarily business-friendly and migration-critical. However, in view of possible tax cuts for private households and companies and the weak economy, the pace of debt reduction could slow.

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