Opaque codes of behaviour are damaging Austrian business

In recent weeks, Austria has not been short of scandal.

In mid-November, prosecutors filed bribery charges against three prominent businessmen. That followed the collapse of the government in October, when chancellor Sebastian Kurz was accused of being part of a scheme to abuse taxpayer funds to boost his popularity using bogus polls and newspaper adverts.

And there are indications more is to come: prosecutors are still probing the labyrinthine connections between one of Europe’s biggest gambling firms, Austria’s Novomatic, and the country’s ruling political class.

There is also a parallel investigation into the activities of Wirecard, the German fintech run by two Austrians that was found last year to have been a giant fraud.

All of this is familiar territory. In 1985, Germany’s Der Spiegel dubbed Austria — which was then in the grip of a similar cluster of fraud and graft investigations — the “Skandalrepublik”. Great protests in Austria followed. But, today, it is hard not to jump to similar conclusions. In 1985, at least, the scandals did not claim the scalp of the chancellor.

For most foreign investors in Austria, this will be little more than noise. But the recent scandals do reveal a truth about Austria that continues to strike many foreigners doing business there: it is still a country in which who you know, not what you know, carries great weight.

In myriad ways, doing business and raising capital in Austria is not like it is in Germany, let alone in London or New York.

Ferdinand Tönnies, one of the founding fathers of German sociology — alongside the much better known Max Weber — would have recognised the distinction. His great work of 1887, Gemeinschaft und Gesellschaft — community and society — categorises two types of human society in the modern period: those bonded by personal relationships and group psychology, and those held together by institutions and laws. Or more neatly: those in which rules are implicit, and those in which rules are explicit.

Tönnies did not necessarily privilege one above the other. In a Gesellschaft-oriented society — as exemplified by unbridled US-style capitalism — impersonal laws can lead to exploitation and suffering as compassion is eroded. In a Gemeinschaft-oriented society, corruption can spread as social groups and networks look after their own.

These are broad — to some extent historically dubious — distinctions, but it is fair to say that, in Austria, the pull of Gemeinschaft is still strong.

It is a notion that helps to explain not just the kind of clubbable corruption in the country that has dominated recent headlines, but also, on a broader scale, the development of Austrian capital markets in general.

Capital in Austria is still dominated by banks and lending institutions. Few businesses raise money from open markets. It is personal relationships that matter. Over coffee, recently, with a very senior Austrian banker, I was told how deep this runs: many entrepreneurs or business owners in Austria are distrustful of what it means to take investment from abroad, or to raise money by selling equity or debt securities.

There is a perception that such measures put businesses at the mercy of rapacious speculators whose interest is a quick buck. Austrian consumers, the banker said, are also reluctant to put their savings into equities.

Instead, businesses are heavily reliant on specific relationships with Austrian lenders — and often with longstanding and very important personal relationships with specific individuals within them.

“The thing is, we really need to develop capital markets here,” the banker said, “because so many businesses need investment. There is a shortage of capital in Austria. But how do I convince people that investing in equities or raising capital like that is not a turbo-capitalistic frenzy?”

A younger Austrian generation of entrepreneurs may change things. The horizons of young tech, medical or engineering businesses in Austria’s thriving start-up scene are not limited by national borders.

Young founders look to Berlin, London and Silicon Valley as much as they do to Vienna for business leads and development.

If such businesses — sparked by Austria’s superb education sector and culture of innovation — can make their needs heard by the government, then there is the possibility of reform. The government has said it wants to make doing business in Austria easier.

But changing the law and changing a culture are different things, as the corruption cases in the headlines currently indicate.

Regardless of the fallout, doing business in Austria is not going to become like doing business in London any time soon, one liberal politician told me on a recent trip to Vienna.

However, there are plenty of places to start. Transparency, the politician said, was key. More transparency would mean less corruption, and would also encourage more outside investment.

“It would be the first best step to being a more open business community in Austria.”

Sam Jones is the FT’s Austria correspondent

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