How Austria’s Leader Is Imperiled by a Video He’s Not In

May 24 2019, 2:48 PMMay 24 2019, 4:42 PMMay 24 2019, 2:48 PMMay 24 2019, 4:42 PM

(Bloomberg) -- Since taking power in 2017, the EU’s youngest leader, Chancellor Sebastian Kurz of Austria, has tried to show that conservatives can effectively work with right-wing nationalists who once were at the fringes of politics. Now that strategy has come back to bite him, in the form of a video showing Austria’s vice-chancellor, Heinz-Christian Strache of the far-right Freedom Party, promising state contracts for cash. Already it has cost Strache his job and brought down the government of Kurz, who has called for snap elections to stanch the damage. The question now is whether it will also costs Kurz his position as chancellor before -- or after -- new parliamentary elections in September.

1. What’s in the video?

The seven-hour recording, released on May 17 by German publications Der Spiegel and Sueddeutsche Zeitung, was made in 2017 at a villa on the Spanish resort island of Ibiza. It shows Strache promising government contracts to a woman claiming to be a Russian oligarch’s niece and plotting the takeover of Austria’s largest newspaper. Johann Gudenus, the Freedom Party’s parliamentary leader, translates the conversation.

2. What’s been the fallout?

Strache veered between contrition and defiance, apologizing for the “dumb” and “embarrassing” footage while claiming he was the victim of a “targeted political assassination.” He stepped down on May 18, the same day Kurz called for snap elections. Critically, the chancellor concluded that the Freedom Party could no longer be trusted to run the Interior Ministry. The dismissal of Herbert Kickl -- a luminary among nationalists who’s no stranger to controversy -- riled the Freedom Party and triggered additional ministers to resign, including the heads of the ministries of defense, infrastructure and labor. It also turned Kurz’s erstwhile government partners into rivals with the potential power to take him down.

3. Why does this imperil Kurz?

After leading the People’s Party to a resounding victory over Austria’s Social Democrats in 2017, the 32-year-old Kurz chose to form a government with Strache’s Freedom Party. Both men had run campaigns predicated on restricting immigration, curtailing welfare and lowering taxes, and they appeared to work well together through 17 months in office. Though Kurz is in no way implicated by the Ibiza footage, the embarrassing episode could reflect badly on his judgment in partnering with a far-right party -- one founded by a former SS officer following World War II. Far-right parties from Vox in Spain to the AfD in Germany have enjoyed growing popularity throughout Europe, but Kurz broke ground in inviting one into a ruling government coalition. Now, the Freedom Party itself may be transforming from a Kurz ally into a threat.

4. In what way?

Austria’s smallest opposition party, Liste Jetzt, has moved for a vote of no-confidence against Kurz, which could lead to President Alexander Van der Bellen appointing a caretaker government -- likely without Kurz at the helm -- until the snap elections. To succeed, the no-confidence motion would need the support of lawmakers from both the Freedom Party and the Social Democratic Party. Both parties say they’re considering the motion.

5. Who are the potential winners and losers?

Kurz has the most to gain -- and to lose. He remains popular, and his People’s Party gained four percentage points in the first poll after the scandal broke. He told rattled voters this was their chance to help his conservative party consolidate power and drive through more reforms. The European Parliamentary elections could indicate whether he has a chance to muster the landslide victory he’d need to govern alone. While the Freedom Party is almost certain to lose some support, its efforts to blame international conspiracies for the video set-up could help retain core supporters. The center-left Social Democrats have so far struggled to profit from the crisis.

6. Should investors be worried?

There’s little chance of economic disruption in the short-to-medium term. Austria had a budget surplus for the first time since 1974 last year as brisk tax revenue growth outpaced expenses. Many analysts ascribe more risk to potential international trade disruptions than internal political strife. Austria’s export-dependent economy relies heavily on automobile manufacturing -- a point Kurz made clear to U.S. President Donald Trump during a visit in February. S&P Global Ratings has warned that the government collapse and Kurz’s robust style have undermined Austria’s long-term predictability.