One of the great ironies of modern economic history is that the country that produced one of the most influential – and we would argue sound – schools of economics has all but expunged its lessons from its collective memory.

We are speaking, of course, of Austria, the cradle of the so-called Austrian School, an economic philosophy pioneered by Carl Menger in Vienna in the late 19^th century and further developed by economists Eugen Böhm-Bawerk, Friedrich Hayek and Ludwig von Mises.

Rather than embrace the principles they developed, such as the importance of individualism and a rejection of central planning, Austria, like the rest of Europe, was wooed by the siren call of the nanny state, a.k.a. Keynesianism.

A century on, Austria remains a useful laboratory for understanding the broader European economy. Austrians received an update on how their long-running Keynesian experiment is doing this week, with news that the EU had initiated its dreaded “Excessive Deficit Procedure” against Vienna.

The process was triggered after the country recorded a budget deficit of 4.7% of GDP last year and is on track to hit 4.5% this year, well above the EU limit of 3%. Austria’s total debt, which was equal to 83% of GDP at the end of 2024, is also in clear violation of the Stability and Growth Pact’s limit of 60%.

Yet Austria remains one of the wealthiest countries in the world and is far from being the worst offender when it comes to fiscal discipline in the eurozone. What makes the Austrian example noteworthy is that it was supposed to be one of Europe’s fiscal stars, a proud member of the ‘Frugal Four’.

Its membership has clearly expired. Not only are Austria’s debt and deficit out of control, but the country does not have a credible plan to dig itself out of its hole. That has little to do with cyclical issues and everything to do with secular shifts in its economy, for which the social democratic ideals on which its political system was built have no answers.

The most important shift is in the industrial sector, which accounts for nearly one-third of output. The auto industry, a major employer, is in secular decline (Austria is an important supplier for Germany’s flagging car sector) amid the ongoing shift from the internal combustion engine to EVs. The economy lost thousands of auto jobs over the past year alone, and more pain is on the way.

That weakness helped push Austria into recession in both 2023 and 2024, and its economy is on track to contract further this year. In fact, the IMF has predicted Austria will be the only industrial economy in the world to contract this year.

Meanwhile, the Austrian government continues to spend money like its 1913. Total government spending this year is projected to reach 57% of GDP after 56% in 2024. Vienna has a good chance of supplanting France for the first time as Europe’s most profligate state. That’s a particular achievement considering that the neutral Alpine state spends well below 1% of GDP on defence.

Read more.

EU steel lobby calls for retaliation to US tariffs. European steel producers are "being flooded by cheap foreign steel" and cannot cope without "swift action," EUROFER warned. The warning followed increased US tariffs on steel and aluminium, which rose from 25% to 50% on Wednesday. The EU has prepared countermeasures worth approximately €100 billion on US goods, to be deployed if ongoing talks fail. Read more.

Bulgaria gets green light to join eurozone in 2026. Brussels formally approved Bulgaria's years-long bid to join the single currency, paving the way for it to become the eurozone’s 21st member on 1 January 2026. It marks a significant victory for Sofia’s government and came amid major protests across dozens of cities in the country, with many citizens concerned that the currency switch could lead to steep price rises, especially for food. “The euro will bring tangible benefits for Bulgarian citizens and businesses: stable prices, lower transaction costs, protected savings, more investment, and increased trade.” EU economy chief Valdis Dombrovskis said. Read more.

Austria hit with excessive deficit procedure. The European Commission formally reprimanded Austria for breaching the EU’s budget rules on Wednesday, compounding the woes of the Alpine country’s new conservative-led government as it struggles to reverse years of economic decline. A senior commission official described Austria as "an outlier" amongst EU countries running public deficits, expecting it to run deficits above 4% of GDP in 2026 as well. Read more.

ECB cuts interest rates, growth forecast unchanged. Thursday saw the European Central Bank cut interest rates for the eighth time since June 2024 in an attempt to boost a beleaguered eurozone economy. It came after eurozone inflation fell to 1.9% in May – the first time since September last year that it dropped below the ECB’s 2% target rate. However, the projection for GDP growth in the euro area remains at 0.9% for 2025. Read more.

EU won’t pivot to China even if US trade talks fail, says Poland. The European Union will not seek to soften the impact of Donald Trump’s tariffs by boosting trade ties to China, even if talks with the United States break down. Poland’s trade minister told Euractiv that the EU’s relationship with Beijing is “independent” of the bloc’s links to Washington. The comments come as the US imposes sweeping tariffs on Europe. Read more.