The Magic Pentagon

Austria Table of Contents

The Austrian government and Austrian economic institutes and analysts have long evaluated the country's economic policies and general economic situation on the basis of five standards, which are termed the magic pentagon: keeping the GDP growth rate as high as possible; maintaining the current account balance as high as possible; keeping employment as high as possible; holding down the inflation rate as much as possible; and keeping the government deficit as low as possible. The objective of government policies is to keep some of those measures as high as possible and some as low as possible. Austrian statistics sometimes show the five different objectives as five arrows emanating from a central core, with lines connecting the current statistics on each of those arrows so that they form a pentagon. The purpose of government policy is to make the pentagon as large as possible, recognizing that there might at times be some required trade-offs among the different objectives.

One of the most important elements in the policy mix is a determination to combat inflation--not an easy task, especially given the significant fiscal deficits during parts of the 1970s and 1980s. To fight inflation and keep the schilling strong and stable, the government relies heavily on attaching the schilling to the deutsche mark and following the policies of the German Bundesbank. These practices, on the whole, have kept inflation at acceptable levels. Low inflation has tended to reduce the demands for higher wages. Consumer price increases held steady around the late 1980s but crept up in the early 1990s to 3.3 percent. Producer prices increased at a slower rate, but wages rose even faster. As a result of the government's policy, Austria has had one of the lowest inflation rates in Europe, and the schilling has consistently been one of Europe's strongest currencies.

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Source: U.S. Library of Congress