Peter Geoghegan: Slovenia falls from grace

Prime minister Alenka Bratusek has been forced to come up with a package to avert a bail-out for the struggling country. Picture: AFP/Getty Images
Prime minister Alenka Bratusek has been forced to come up with a package to avert a bail-out for the struggling country. Picture: AFP/Getty Images
Have your say

Peter Geoghegan warns that we ignore at our peril Slovenia’s slump from Yugoslav powerhouse to the eurozone’s poor relation

IN NOVEMBER 1989, the Berlin Wall fell, heralding what American political scientist Francis Fukuyama hubristically called “the end of history”. The following month, almost 1,000km away in Ljubljana, the Slovene Communist Party, led by reformist leader Milan Kucan, changed its name to ZSK-Party of Democratic Reform. The new party’s message was simple: “Europe now!”

Kucan went on to become the first president of an independent Slovenia. He held the position until December 2002, by which time “Europe” was just around the corner: in 2004, Slovenia joined the European Union. That same year it also became the first so-called transition country to graduate from borrower to donor status at the World Bank.

Politically and economically, Slovenia is definitely European now – it’s even a fully-fledged member of the eurozone crisis club. The economic powerhouse of the former Yugoslavia, Slovenia has been in recession since 2011. Its banks are on 
life support, reliant on a 
$1.2 billion (about £780 million) recapitalisation just to stay afloat.

Last month, Slovenian prime minister Alenka Bratusek, barely two months in the job, was forced to announce a series of measures aimed at averting a bail-out: VAT will be increased by 2 per cent; 15 publicly-owned businesses will be sold off, including the national carrier Adria Airways and Telekom Slovenia, and a “bad bank” will be created.

In Brussels last week, Olli Rehn, the EU’s economic and monetary affairs commissioner, said the plans should be enough to stave off a bail-out for Slovenia. But the European Commission also called for an immediate external review into Slovenia’s banking sector as bad loans continue to rise.

Slovenia might yet stave off a bail-out, but there is little cheer on the streets of the small, rather idyllic Alpine state. When I visited last month, I found the cobbled streets and busy riverside cafes in the historic core of the capital, Ljubljana, as charming as ever, but away from the tourist trail Slovenia’s woes were all too evident. Retail units lay empty, as did new apartment blocks. Emigration is up. Unemployment, historically low even after communism, stands at more than 13 per cent. Lack of infrastructure investment has terminally weakened a once powerful manufacturing sector.

Slovenia’s problems stem in part from the crisis in the eurozone, but they are also a function of a transition from Yugoslav socialist republic to market economy in the early 1990s that was less smooth than it appeared. The “Slovene Spring” of 1988, with its calls for democratic reforms and more control for the economic wealth generated in Slovenia, paved the way for independence, which was declared three years later. The Ten Day War with Yugoslavia ended with the Slovenian police and armed forces recognised as sovereign on their own territory, and Slovenia on the cusp of full independence.

Faced with local control for the first time in its history, Slovenia’s post-independence leaders pledged to keep the country’s economic assets in Slovenian hands. Eschewing the privatisation model followed by the likes of Poland and Romania, Slovenia left many of its best companies in the hands of the state and a new generation of “managers”. Over time these managerial executives became the new elite, eventually taking out huge loans to buy controlling stakes in the companies they ran.

The case of Bine Kordez is instructive. Having built up the Slovenian home improvement chain Merkur into a regional giant, Kordez borrowed around €350m (about £300m) to buy out the company. It was the biggest deal in Slovenian history. Cheap credit for the Merkur deal came from a conglomeration of ten banks, including a state-run Slovenian institution. Slovenian banks, in turn, were borrowing vast sums on international markets to fund such managerial buy-outs, taking advantage of Slovenia’s low public debt and its reputation for prudent financial management.

“I had no real collateral for a deal of that size,” Kordez, who is currently appealing a conviction for forgery and abuse of office, told the New York Times recently. “Just my house, a few hundred thousand euros, a smart business plan and my reputation.”

Merkur is just one of a number of formerly blue-chip Slovenian companies struggling. Net spending in the country is down 3 per cent on last year. Many debtors like Kordez are under water, leaving a black hole in the balance sheet of Slovenian banks that has been filled by a massive tightening of lending to the national economy. This vicious circle has exacerbated difficulties in the export-led Slovenian economy.

The crisis has also laid bare the close connections between business and politics in Slovenia. Earlier this year, prime minister Janez Jansa was forced to step down after a report from the anti-corruption agency identified irregularities in his tax returns. As head of the 
2004-8 government, Jansa oversaw huge tax cuts and increases in government spending. An incredible 94 per cent of Slovenians consider bribes to be a normal practice in business, according to a recent study by Ernst & Young.

The same commitment to, and close ties with, family, community and the Catholic Church that sustained Slovenes under communism created the conditions for the current crisis. “We are one, not too big, dysfunctional family,” sociology professor Franc Trcek told me when we met in the northern city of Maribor.

That Slovenia has moved from being the most prosperous – and culturally “North European” – republic in Yugoslavia to an impecunious member of the eurozone’s cash-strapped periphery has not gone unremarked upon in the coffee shops of Ljubljana. Less noted, however, are the similarities between Yugoslavia in 1988 and the eurozone in 2013.

Tito’s Yugoslavia was avowedly federal. Key to this was the transfer of cash from the more developed republics – notably Slovenia – to the less developed periphery. In good times, the system worked reasonably well, held in place by an over-arching “Yugoslav” identity. However, during the 1980s, in the face of a global recession and mountains of foreign debt, Yugoslavia’s federal system began to crack. “Why are our industries paying for Kosovo, Bosnia and Macedonia?” people across Slovenia asked.

The parallels with conversations going on from Bonn to Berlin today are striking. “Why can’t they be more like us?” German politicians say of the Spanish, the Italians, the Greeks and, now, the Slovenians. “Why can’t they run balanced budgets and trade surpluses?”

But the reality is that the whole of the eurozone cannot be Germany – for one simple reason: the eurozone is too big for each member to be a creditor country. As Martin Wolf has pointed in the Financial Times: “Europe will not become a bigger Germany. It is foolish to believe it ever could.” Yet, at the same time, Germany profits from the crisis, which is keeping the euro low and its export-dependent economy buoyant.

The same was true of Yugoslavia in the 1980s – regional imbalances were inherent in the design of Tito’s socialist economy; relatively impoverished Macedonia could never become affluent Slovenia.

There is little danger of the European Union collapsing into ethnic violence, but we neglect the lessons of Yugoslavia in the late 1980s at our peril. The core, essentially Germany, needs to desist from economic nationalism at the periphery’s expense. The extent to which Europe’s economies are symbiotically linked – after all German surpluses depend on sales to the periphery – needs to be articulated. And the lazy juxtaposition of a diligent European “North” and a feckless “South” needs to be avoided.

As a young man in Maribor told me recently: “Under socialism, Slovenia was the rich north, now we are the poor south. That doesn’t feel right.”