FT REPORT - SLOVAKIA 2008: The tiger that beat the odds

By Jan Cienski in Bratislava

Sovakia joins the eurozone next year, becoming only the second ex-communist country to do so - an achievement many thought unlikely and one that continues to elude its former Soviet-bloc neighbours.

The government of Robert Fico, the prime minister, regards euro entry as its signal accomplishment and a rebuke to those who warned two years ago that the coalition created by his Smer party with smaller xenophobic and populist parties would lead to economic disaster.

"In 2006 many politicians, many analysts, many people, believed that my government would be very bad for the country, for the economy, for everything," says Mr Fico. "But the fact is that, in 2008, we have the highest economic growth in the European Union, we have control over inflation, there are only positive trends. The introduction of the euro is another success of this government."

Slovakia's admission was grudging, with the European Central Bank worried about its fitness for the euro, stressing that it had "considerable concern" over the country's ability to restrain inflation.

For Mr Fico, in many ways, getting into the euro was the easy part. Most of the heavy lifting had been done by his predecessor, Mikulas Dzurinda, who undertook radical reforms that turned Slovakia into a European tiger. But the reforms, combined with corruption scandals and chaos in the governing coalition, so disenchanted voters that they replaced Mr Dzurinda's centre-right government with Mr Fico and his left-wing populists.

All Mr Fico had to do was not up-end the reforms, as he had promised during the election campaign. That he accomplished.

"We haven't witnessed a major reversal of reforms as had been suggested before the election," says Jan Toth, chief economist for ING bank in Slovakia.

The result is an economy which grew at 10.4 per cent and which is expected to expand by 7.5 per cent this year. That growth has unleashed higher inflation, at an annualised 4.6 per cent in June, but the government remains confident that it will not spin out of control.

Despite his occasionally populist pronouncements, Mr Fico insists that he will not let spending rip - even once his country is safely a member of the euro - and that he is committed to the goal of reducing the structural deficit to 0.9 per cent of GDP by 2010.

"We will continue the consolidation of public finances," he says, adding that wage increases will be limited to increases in productivity, which last year was 7 per cent.

Hoping to stifle the inflation that is a natural result of a fast-growing economy catching up with more developed partners, Slovakia argued for and received a very strong final conversion rate - 30.126 korunas to the euro - which made exporters wince but pleased voters and should keep inflation under control for the next couple of years.

Slovakia made its biggest strides during a very benign economic environment, when Germany was growing strongly and foreign investment poured into the country - last year FDI came to $2.1bn, or 2.8 per cent of GDP.

The economic situation is very different now, with food and energy prices soaring, and growth in western Europe slowing. That spells potential trouble for one of Europe's most open economies, but so far the government has no plans for any kind of deeper economic reforms.

When pressed, Jan Pociatek, the finance minister, pauses and lists a series of measures he calls "small things" such as centralising procurement and merging the customs and tax offices.

Most of Mr Pociatek's efforts seem aimed at ensuring that prices do not surge too high next year, when the euro is introduced. He is setting up a special committee that will compare prices in Slovakia and neighbouring countries, with the power to intervene, while Mr Fico warns retail chains not to take advantage of the currency change.

"We will try to fight speculative movements," says Mr Pociatek.

That approach may please Mr Fico's voters, but may not be enough to ensure Slovakia's continued rapid development.

The most obvious problem is the over-stretched labour market, particularly in the booming west of the country.

"It's really difficult to find workers," says Martin Pytlik, a board member of Tatra Banka. "We're having trouble finding IT and risk management specialists and they are becoming very expensive."

Slovakia's national unemployment rate is 7.4 per cent, but that conceals enormous regional disparities. About 200,000 Slovaks have left to work abroad.

"People with high potential have left the country and we really miss them," says Peter Hajas, CEO of Sario, the Slovak investment agency.

Finally, there is the country's greatest success but also its greatest risk - the car industry. Cars account for about a third of exports. But if the current economic turmoil and high fuel prices cause a fall in European auto sales, the impact on Slovakia could be big.

"We are nervous that a huge proportion of investments are in car production," says Mr Fico.

For a small, export-oriented economy, the coming years could be difficult, but Slovakia has already beaten the odds by becoming one of Europe's most striking success stories.