IN THIS week’s issue of The Economist I have a report from Austria on the growing fractures in the country’s politics and society. Here are the opening paragraphs:

TO UNDERSTAND Austria, visit the Karl-Marx-Hof. This vast municipal housing complex in Vienna is still riddled with bullet holes—not from fighting between Russians and Germans in 1945, but from a little-known civil war in 1934, when Austrian leftists and conservatives took up arms against each other. After the second world war, the country adopted a political system designed to prevent this from ever happening again: the Social Democrats (SPÖ) and the Christian Democrats (ÖVP) would rule together and divvy up public offices under a system known as Proporz.

For 43 of the past 72 years the two parties have run Austria jointly, in grand coalitions. Their networks politicise everything from school boards and business groups to social clubs and unions. The result is a uniquely corporatist country.

Today, however, that system is breaking up. Other parties—first the far-right FPÖ, then the Greens, then the liberal NEOS—have challenged the old duopoly. Both the SPÖ and the ÖVP have lost members. Economic stress adds to the pressure. A decade ago Austrian unemployment was a little over half that of Germany; now it is 50% higher. On May 10th Reinhold Mitterlehner, the ÖVP vice-chancellor, resigned and brought down the dysfunctional SPÖ-led grand coalition. Elections will take place on October 15th. “What is happening in this country?” marvelled Profil, a news magazine: “Austria is unrecognisable, and redefining itself breathtakingly fast.”

The full piece is here.

During my reporting I interviewed Christian Kern, Austria’s SPÖ chancellor. We met at his office in the baroque chancellery—part of the archipelago of grand Habsburg ministries and residences that sprawls across central Vienna—and discussed Austria’s current moment of flux, the collapse of the grand coalition, his “Plan A” for the country and his refusal to rule out a coalition with the FPÖ. We also talked about Sebastian Kurz, his ÖVP foreign minister and main challenger in the election, whose own response to recent events is a new list-based movement partly inspired by Emmanuel Macron’s “En Marche!”. The full transcript, which I have translated and lightly edited for clarity, is below.

Especially notable were Mr Kern’s assertions that:

• After six difficult years, Austria’s economy is picking up again
• Its unemployment rate is a product of its unique vulnerability to wage competition from newer EU member states to its east and south
• The grand coalition grew apart as the gap between the interests and outlooks of the two parties became too wide
• The ÖVP’s powerful regional barons and interest-based federations blocked both education reform and a new green-energy law
• Austria’s model of consensus, grand coalitions and Proporz (see above) made Austria strong but needs “fundamental reform”
• Forming a new grand coalition would be “very difficult” and would be impossible “with the current line-up”
• One test of whether Mr Kurz’s list is “PR or substance” is whether established ÖVP grandees appear on it
• A coalition of the SPÖ, the NEOS and the Greens, though impossible according to current polls, is “interesting” 
• Austrian politicians need to be aware of the diplomatic damage that a coalition including the FPÖ (which neither Mr Kern nor Mr Kurz rules out) could cause
• The ÖVP has shifted massively to the right under the influence of the FPÖ
• The SPÖ has not moved to the right apart, perhaps, on asylum and immigration

The Economist: In your speech in Wels five months ago you said that the SPÖ had disappointed some voters. Why should these voters now vote for your party again? 

Christian Kern: We have shown in the past months that we are in a position to put forward policies that speak to people’s living standards. We have made some very concrete proposals (especially in “Plan A”) for the next ten years, and not just in the traditional social democratic field of social justice. That project is obviously not just about snapping your fingers and people suddenly rallying to your side. It’s about building up trust over the long term.

But look at what has happened in Austria over the last 12 months. We have 63,000 new jobs, a better performance than Germany. Over 300 international companies have moved to Austria, a record number. More people are in employment than ever before. The public and private investment rate is 3 percentage points higher than the German one; if Germany invested as much as Austria that would be €90 billion more.

So Austria is “the better Germany” again? [this is a reference to a famous German magazine cover from 2005, illustrating how much better Austria’s economy was doing]

I would not put it like that. But I would say this: we have reached a point, after 6 difficult years of palpably declining real wages and sub-average growth, where things are changing. We have set our course and are catching up well.

The unemployment rate remains one of our most serious problems but it has to do with our unique position. We are on the frontline of the EU’s central and eastern accession states. Average wages in Romania are 18% as high as those in Austria, in Bulgaria it is 14%, in Slovenia it is 46%. So you have lots of people coming onto the Austrian job market.

And you’re ascribing these economic difficulties to that?

Exactly. That’s why unemployment in Austria is a special case, because the supply of labour here has risen disproportionately. 

Have the structures of Austrian society and the Austrian economy played a role?

I think we have a very effective economy. We are one of the countries with the highest industry shares, at around 20% of GDP. That is an immense strength. And of course our goal is to develop and modernise this. It helps that the export markets are now picking up; that is already very evident here. Throughout the past year we have seen the Purchasing Managers’ Index rising month-on-month. So in terms of our overall economic conditions we are in a really good position. And don’t forget, we are still the fourth-richest country in the EU.

How would you sum up your Plan A?

Plan A is a modernisation strategy that aims to advance Austria in all areas. One key point is employment: supporting investment in projects like the expansion of the energy-tech sector. The other big theme is education, which plays a huge role in Plan A because our future competitiveness will depend on the qualifications of our workforce. You can change the taxes easily; any country can do that. But our strength will be an education system guaranteeing our competitiveness. And the third point is social justice: social care, redistributive justice and so forth. Plan A is the social democratic answer to the question “how can we create prosperity secondly ensure it is fairly distributed”? 

Now let’s talk about politics. Why did the grand coalition fail?

We had this model of government for ten years and individuals in it have grown apart. I think that ultimately the heterogeneity of interests was too big, I think the parties see society differently and have different visions for it…

What do you mean by that? 

For example, on education reform. Here I support doing as much as possible centrally. In Austria our education system is very strongly influenced by the states and provinces. I want to limit their influence, to speed up decisions and depoliticise schooling. That is not doable with the ÖVP because of their state governors.

And the teachers?

Of course there are the teachers’ unions, but most of all it is the strong states saying they don’t want it. A second example is the green energy law. I want to invest heavily in this sector and use the cheapest and most efficient technology, because industries and households pay the bills. But the ÖVP wants to promote bio-gas generation, by a distance the most expensive option, because they want to support the large-scale farmers. There is a farming lobby in the ÖVP saying “we want that”. By contrast our priority is efficiency. In the past we would have met in the middle, but that held back progress.

This ability to compromise made Austria strong after World War Two. The difficulty is that in an age of rapid globalisation and technological change this consensus-based politics model slows you down a huge amount. You are not in a position to adapt your policies fast enough.

I am interested in this “Austrian model” that emerged after World War Two: grand coalitions, compromise, the Proporz system. That is really unique. 

Yes. It made Austria strong.

But is it fit for the future?

Looking at the raw figures the answer is “yes”. But looking at mood in politics and among the population, it needs fundamental reform.

In what sense?

I think a new grand coalition after the election will be difficult considering that the ÖVP terminated the coalition.

Under no circumstances?

We could not continue with the current line-up. We need to reform the basic idea and think some more about how it might work. But now both parties will put themselves forward and we’ll see which one can form a majority.

These parties have governed Austria together for two thirds of its post-war history. What changed in Austrian society for them to conclude that they are now incapable of doing so?

I think people’s fundamental interests have changed. The federations [Bünde] – the Business Federation, the Farmers Federation and so forth – are a major force in the ÖVP. But the demand for them is declining. Start ups for example have no desire to be organised into chambers of commerce. They don’t see the point. Likewise, practically none of the people who work for start-ups are in the trade unions, a crucial foundation of social democracy. This paternalistic system is dissolving. In the past it ran from cradle to grave: you would spend your free time in the Alpine club, at work you would be member of an SPÖ or ÖVP trade union, from the nurseries to the emergency services everything was parcelled up. These connections have dissolved dramatically. They do not exist any more. And the political parties are exposed to these harsh winds.

Is the…

Yet curiously the two big parties go into this election campaign greatly strengthened! That’s the curious thing. 

Is your foreign minister’s list-party a good answer to this structural change? Or is it just for display? 

You have to differentiate the PR from the substance. At the end of the day the ÖVP is the ÖVP, whatever nameplate you hang on it.

Even if it brings in people from other social groups or from outside the ÖVP?

The question will be: are Mr Sobotka [the ÖVP interior minister], Mr Lopatka [the ÖVP parliamentary leader], the head of the [ÖVP] Business Federation on the candidate list or not? If they are, it doesn’t matter whose face is being used to rebrand the party.

If a new grand coalition is improbable, the question of coalitions with the FPÖ arises. I know that Austrian politics has changed since the 1990s, but aren’t you worried that your decision not to rule out a red-blue coalition will cause diplomatic problems? I can tell you as a journalist: that will be the big international story of this election campaign.

Sure. That will be so and we have to be aware of it. It is why I was against early elections, because they give the FPÖ a red carpet into government. That is why I was saying “let’s try and make this work”, because for all the difficulties the prospect of the FPÖ suddenly taking centre stage in Austrian politics would be a much worse alternative. But unfortunately the actions of the ÖVP have allowed that to happen. They gave this less consideration.

Your ideal option would presumably be a coalition with the NEOS and the Greens, a sort of “traffic light” coalition? Is that right?

Yes it’s an interesting option for me.

But the numbers are not exactly there…

Unfortunately politics is not a request show. You don’t always get your first choice.

What should be done in the long term to push back against populism?

You have populism in the form of certain political parties, though I would call it “demagoguery” rather than “populism”… But most significant is the way these parties are pushing the whole political spectrum to the right. Look at the Netherlands. The consequence of Geert Wilders’s rise has not been that he has won elections but that previously centre-right parties suddenly moved a long way to the right. That is happening here too. There has been a massive shift to the right within the ÖVP. So the FPÖ is a factor in itself, but it is also affects Austrian politics as a whole.

Despite Mr Kurz’s modern image?

Certainly. 

He talks of modernising his party.

Sure. We are doing that too. You have to. But ultimately politics is not about tactics but values and how you see your fellow citizens. And there you will find big differences. The ÖVP has certainly moved clearly to the right.

Has the SPÖ shifted to the right, on the politics of asylum for example?

Perhaps on immigration, on asylum. But on other issues—economics, society, women’s rights—definitely not. 

The issue of gay marriage is clearly a big issue here.

It’s an issue, yes.

There was a big battle in Parliament about it.

Unlike the ÖVP we want marriage for all, with equal rights. So it will play a role in the election. There was a vote on a so-called “timetabling motion” but the coalition turned it down because there was not a parliamentary majority for the measure, the ÖVP and FPÖ both being opposed. Which I find shameful.

So you doubt that Mr Kurz can get his party to support gay marriage?

We will see. I consider it urgently necessary.

And what can we expect from your election campaign?

We have started with Plan A, our modernisation strategy for the country. And look at our ministerial team. Our health minister is an internationally recognised scientist, our education minister was rector of a university, our culture minister has run major cultural institutions, the cabinet secretary is a Sorbonne-educated lawyer. So I think even if the ÖVP has the slickest packaging we are a good way ahead in bringing in new, fresh people. And we plan to take this process of opening up and modernising the party much further. We have to position ourselves in the middle of society and that is what we will do. 

Does this “modernisation” mean a centralisation of the SPÖ?

Not necessarily. We are already a pretty centralised party; central control in the SPÖ has always been stronger than in the ÖVP.

And does Austria need to be more centralised? You have spoken of the power of the state governments.

What is clear is that we need to reform the state. Austria’s organisational structures are very complicated. Our administrative structure is more elaborate than that of Bavaria, though we have half the population. That shows we need to do something. The savings would be in the billions.

More generally, what needs to happen to the “Austrian model” to make it work in the future?

I think it is important to proceed with it. Of course the challenge is to modernise and adapt it, and that will take some time. But particularly given the coming digitalisation it is important to seek a social balance because this will be a time of great social fragmentation between winners and losers. We see it as our job to make sure there is a fair distribution of prosperity. Part of the Austrian model has always been making sure that no-one is left behind. Scandinavia aside, we are one of the world’s more egalitarian countries and we should preserve that business model. 

Can the Proporz system survive?

It is already breaking up in many areas. It is still very influential, but more limited than before.

Does that process need to go further?

Absolutely. 

Herr Bundeskanzler, many thanks.

Thank you.