Austria Faces Potential EU Deficit Sanctions as Historic Coalition Takes Office
By Sophie Hrneck
Austria’s new government, an alliance of three ideologically diverse parties, has barely settled into office when it now finds itself under immediate pressure from Brussels. On June 4, the European Commission initiated an Excessive Deficit Procedure against Austria, citing persistent violations of the EU’s fiscal rules. The country’s budget deficit reached 4.7% of GDP in 2024 and is projected to remain above the EU’s 3% threshold in the coming years.
This development marks a difficult start for Austria’s first-ever three-party coalition, uniting the conservative People’s Party (ÖVP), the center-left Social Democrats (SPÖ), and the liberal NEOS. After months of deadlock following the September 2024 election, the coalition took office in March, forming an unprecedented alliance to prevent a swing toward more extreme parties. But governing during a fiscal crisis and a continuing recession will test their unity from the outset.
The Challenge: a Weak Economy, a Growing Deficit
The EU’s disciplinary move comes at a time when Austria’s economy is already under strain. Like much of Europe, the country has been weighed down by modest consumption, high inflation, and declining industrial production as well as low investment.
Against this backdrop, Austria’s deficit has increased. Generous social spending, inflation-linked pension increases, and past tax relief measures have all expanded the fiscal gap. While such spending helped soften the economic blow for households, it also raised concerns in Brussels about the long-term sustainability of these policies.
The European Commission has acknowledged Austria’s efforts to regain control of its public finances but said these are not yet sufficient. Unless the government presents and implements credible measures to reduce the deficit below the 3% limit, Austria could face formal sanctions later this year.
A Coalition Under Pressure
For the newly formed government, the timing could hardly be worse. The coalition parties, each with different visions for economic policy, now face the politically sensitive task of cutting spending and increasing revenues, without alienating voters or breaking apart. The ÖVP emphasizes fiscal discipline, the SPÖ opposes measures that it deems too harsh, and NEOS pushes for structural reforms.
Their governing agreement outlines a plan to reduce the deficit through a combination of spending cuts and new taxes, targeting €6.4 billion in savings in 2025. Proposed measures include scaling back subsidies, reforming pensions to incentivize longer working lives, and introducing taxes. However, many of these are politically sensitive.
One of the strongly divisive issues is pension reform, particularly raising the retirement age. While the ÖVP and NEOS support such changes as necessary for long-term sustainability, the SPÖ strongly opposes them, possibly driven by a wariness of alienating its core constituency of older voters. This divergence underscores challenges that will have to be dealt with in the coalition.
The Politics of Compromise
The three-way coalition was born out of necessity rather than shared ideology. Its primary aim was to keep the far-right Freedom Party (FPÖ) out of government. As such, it represents a delicate balance of competing priorities. Each party has been granted autonomy over its policy areas, but economic policy inevitably cuts across all of them. However, politics is the constant pursuit of compromise.
Maintaining cohesion will require careful negotiation and a willingness to compromise. Any missteps, particularly in implementing the budget plan, could deepen political fractures or revive support for the FPÖ, which remains strong in opposition and is openly critical of the EU, including its fiscal oversight.
Nonetheless, with Austria’s economy expected to return to growth in 2026 and Germany’s economy outpacing earlier forecasts, there is cautious optimism that improving external conditions could support the coalition’s efforts to stabilize the public finances.
*Please note all content reflects the opinions and views of the author alone, not necessarily those of European Liberal Youth
Austria Faces Potential EU Deficit Sanctions as Historic Coalition Takes Office