Once a star among EU newcomers, Slovenia sees economy crumble as old socialist model falters

LJUBLJANA, Slovenia – Andrej Plut has always thought he was fortunate to live in Slovenia, at one time the most prosperous of the former republics of Yugoslavia and a star among the eastern European states that joined the EU after the fall of communism.

The 55-year-old dentist can't figure out what went wrong with his tiny Alpine state, which now faces one of the worst recessions and financial system collapses among the crisis-stricken 17-country group that uses the euro.

"We used to live so well," Plut said. "Now, we don't know what tomorrow brings."

Slovenia's crisis could lead it to become the sixth member of the eurozone, and the first among the bloc's ex-socialist members, to seek an emergency bailout to avoid bankruptcy. The immediate cause was rampant lending by state-controlled banks to the real estate market and unprofitable companies that are now unable to repay their debt. But experts see an underlying reason: Despite the appearance of modernizing its economy, Slovenia never really made the transition from socialism to free markets.

Instead of privatizing factories and other assets, state companies largely remained in public hands, or with a murky ownership structure. And foreign investors were kept at bay.

"Slovenes," said Niko Tus, Slovenia's leading sociologist, "never really embraced capitalism."

When the former Yugoslavia started disintegrating into a bloody civil war in the early 1990s, Slovenia was the first to break from the federation and did so with little damage. It undertook economic and social reforms, while Croatia, Bosnia and Serbia were fighting each other. Slovenia's export-oriented economy experienced a boom in the late 1990s and the early 2000s.

It joined the European Union in 2004 without much hassle, modernized, built infrastructure and modern roads and swiftly adopted the euro in 2007. It led the other former communist states that entered the EU with it — the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia — with the highest wages and living standards.

On the outside, Slovenia's economy appeared to be a picture of health. Living standards grew steadily, and most people enjoyed social benefits such as free medical costs, all without having to go through the painful transition to free markets that the rest of the former communist countries underwent.

But the seemingly perfect system showed cracks with the financial global downturn in 2008.

Slovenia, with a gross domestic product of about euro 35 billion, suffered severe recession in 2009 with the economy shrinking by more than 8 percent in one year, and continuing to decline. The result was a sharp drop in exports and living standards, and a surge in unemployment, now at about 12 percent — almost double the rate in 2008. Bad bank loans surged to some €6 billion ($7.76 billion), or about 17 percent of the country's gross domestic product.

It was a legacy of decades of Slovene success under the state-run model.

In communist times, Slovenia was known as the "Switzerland of the Balkans." The country of 2 million people was the richest of the six republics that made up Yugoslavia, and boasted export brands such as Gorenje home appliances and Elan winter sporting goods.

Slovenia also was liberal communist Yugoslavia's gateway to western Europe. Its leadership was the most progressive and its way of life the closest to that of the wealthy neighbors Austria and Italy, at a time when the rest of Eastern Europe was tightly in the Soviet grip.

Eight years after joining the EU, Slovenia still looks as neat and picturesque as ever. Slovenes love their outdoor life-style, tourists flock to the resorts in the Alps or the coast. In the capital of Ljubljana, open-air cafes are full at the renovated downtown Presern square, surrounded by ornate 17th century churches and curving stone bridges over the Ljubljanica river.

But Slovenes say that behind the apparent normalcy, the mood is grim.

"All around us, people are losing jobs," Plut said. "And there is nothing in sight to tell us that things will get any better."

Slovenia's borrowing costs on its government bonds reached 7 percent this summer — a threshold that had prompted Greece, Ireland and Portugal to seek financial support from the EU. The International Monetary Fund said the current recession in Slovenia — which it described as one of the worst in the EU — has shown "Slovenia's past economic model to be unsustainable."

The head of the European Bank for Reconstruction and Development, Suma Chakrabarti, recently had some strong advice for Slovenia.

"It is in the long-term national interest of Slovenia to open up its economy to foreign investors," he said.