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Ljubljana, the capital of Slovenia

Diana Ponikvar/Getty Images/iStockphoto

Slovenia was the richest Yugoslav republic at independence in 1991. It joined the euro zone in 2007. But it has been slow to reform and now might need help from the European Union to keep its banks afloat. Bailout or no bailout, it should complete the work postponed for two decades.

When it became a country, Slovenia was the envy of the former Communist world. Although its population was only two million, it was the richest of Yugoslavia's republics. It was also the one with the most contact with the West, with a high proportion of the companies that had established successful export businesses. However, to live up to its potential it had to privatize, shrink the government and supervise the banks.

It fell short. The privatization process was sluggish, because it was based on vouchers that failed to establish a clear ownership structure. There has been remarkably little restructuring of Slovenia's less successful companies or of its banking system, which remained primarily in public ownership. Living standards improved faster than productivity. The result was a loss of competitiveness that produced a payments deficit of 9 per cent of GDP by 2008.

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Slovenia suffered a severe recession in 2009; its output is still 5 per cent below the peak and declining. The result has been high fiscal deficits, although the country's strong starting point means that debts are only now about to cross the Maastricht Treaty debt limit of 60 per cent of GDP. Bad debts have proliferated in the banking system, for which the government has suggest a bailout of a further 11 per cent of GDP.

In addition, Slovenia has among the EU's most actuarially unsound pension systems. An increase in the retirement age to 65 was heavily defeated in a referendum last year.

Bad banks, spiralling debt, poor competitiveness and excessive entitlements – Slovenia looks like a miniature version of Spain or Italy. However, there is hope. Prime Minister Janez Jansa has proposed tough reforms and the prospect of a bailout seems to be melting away opposition. That's helpful – austerity without major reform cannot solve Slovenia's problems.

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