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The mixed reactions to the start of Croatia's membership negotiations with the European Union on the 3rd of October are a case in point. Although the Slovenian government has been one of the most vocal supporters of Croatia's EU membership, unresolved issues - border disputes and the alleged 'theft' of Croatian savings by the government-owned bank Nova ljubljanska banka (NLB) - have poisoned the relationship between the two states to such an extent that Slovenian companies were, to all intents and purposes, excluded from participating in the Croatian privatization process. Yet Croatia is very important for the export performance of Slovenia's economy. Although Germany and Italy are by far Slovenia's largest trading partners, respectively accounting for 23 and 13 per cent of its exports, Croatia, which accounts for 9 per cent, does not lag too far behind. With exports accounting for 70 per cent of Slovenia's GDP, any serious political disagreement with the country's most important trading partners is, therefore, bound to have a negative impact upon the volume of Slovenian exports and thereby on its GDP growth. But the southern markets play an even more important role in maintaining the health of Slovenian economy. The latest data on external trade flows that were published by the government's Institute of Macroeconomic Analysis and Development (ZMAR) serve as an illustration of how importantly exports to the former Yugoslav republics figure in Slovenia's trade balance. According to the ZMAR report, last year (2004) Slovenia's largest trade deficit was with the other 24 members of the EU - imports from the EU exceeded Slovenian exports to that area by EUR 2300 m, a whopping 57 per cent rise from the previous year (2003), while the largest surplus, amounting to EUR 1300 m, was observed in trade with the ex-Yugoslav markets. Of course, this fact has not escaped the attention of critical observers who have occasionally issued warnings concerning the potential overexposure of Slovenian firms to these allegedly volatile and often unpredictable markets, while at the same time recognizing the increasingly important role that the region plays in balancing Slovenia's trade deficit with the EU. Win-win situation? Slovenia, therefore, has a special interest in maintaining and increasing the stability of the region. Upon its entry into the EU, Slovenia had to forsake its commercial policy in favour of the common commercial policy that is primarily shaped and conducted by the European Commission. Preferential trade agreements with the ex-Yugoslav republics had to be cancelled, prompting Slovenian firms to jump over the newly instituted trade barriers by investing heavily in the southern markets, relocating and outsourcing production as well as acquiring indigenous companies. Although sectors that relied heavily on exports to the region were hurt by Slovenia's entry into the EU, ambitious firms have used this as an opportunity to consolidate and restructure their respective sectors. Companies such as Istrabenz and Mercator saw consolidation and restructuring as a self-defence mechanism that would enable them to fend off their EU competitors and at the same time allow them to expand into the markets of former Yugoslavia. While Mercator - after it had attained a market share of nearly 50 per cent and established itself as the dominant Slovenian retailer, mainly through mergers and acquisitions - pursued a greenfield investment strategy, opening shopping malls from Zagreb to Belgrade, the Istrabenz group, as the majority shareholder of the largest Slovenian food company Droga Kolinska, acquired the Serbian coffee producer Gran Prom, thereby making Droga Kolinska the largest food and beverage firm in the ex-Yugoslav countries and the biggest coffee producer in the Balkans. Of course, Slovenian firms have also tried to capitalize on the lower labour costs of the former Yugoslav republics. Droga Kolinska, for example, relocated its production line for the popular Argeta brand of pates to Bosnia and Herzegovina (BiH) and Cimos, Slovenia's tenth largest exporter, invested heavily into opening new factories for car parts in the region. While one is based in the Serbian town of Kikinda, the other will soon start production in Srebrenica, a town in BiH where Bosnian Serb troops massacred more than 8,000 people in what was one of the worst episodes of the Balkan wars that engulfed the region in the early 90's. Although separated by state borders and burdened by memories of the bloody ethnic conflict, the workers from both factories will soon be jointly supplying the world's markets with engine, gear and car-body parts. This type of a deeper economic engagement and cooperation with and within the region might be just what the EU had in mind when it set out to define its strategy towards the countries to be included in the next round(s) of enlargement. Adopting conditionality as the primary instrument of inducing these countries to adopt economic and political reforms, the EU insists that the countries of the western Balkans must enhance and upgrade their regional cooperation before they can be recognized as credible candidates for EU membership. The promotion of foreign direct investment is definitely an important part of this process of regional re-integration: since economic links between the countries of the region were severed after the break-up of the former Yugoslavia in the early 90's, the main challenge for the EU is to bind these countries into a sustainable cooperative framework that would serve their economic self-interests, enhance stability in the region and thus make the necessary political reforms easier to sell to their electorates. Slovenia's politicians have consistently styled themselves as experts in the affairs of the region and claimed that Slovenia could make an important contribution in helping these Balkan countries fulfil the EU's conditions. Although not always borne out by the actions of the politicians themselves, Slovenia has been recognized by the international community as a country which succeeded in escaping the Balkan imbroglio and could, therefore, by virtue of this fact and its undeniable closeness to the region, come up with viable and valuable solutions to many of the region's problems. Maybe this closeness has been the reason behind the relative lack of initiative and involvement on the political side of the equation: but while Slovenia's political motives have been questioned by, for example, the Croatian and Serbian political establishments, the products from Slovenia's pharmaceutical companies and food and beverage sector have been eagerly embraced by consumers and FDI's hungrily awaited by their economies. Slovenian FDI amounted to EUR 269 m in 2003 alone, of which 63 per cent went into the ex-Yugoslav republics, with the Slovenian economy being the largest single investor in BiH. The price of success However, Slovenia's large trade surplus with these countries has already attracted criticism, especially from representatives of various industries from the former Yugoslav republics who have complained about the asymmetric trade relationship with Slovenia and the lack of access to the Slovenian market. The media in BiH even went so far as to accuse Slovenia of buying up Bosnian factories, making a lot of money exporting its products and giving nothing in return thereby effectively practising a new form of 'colonialism'. Similar media campaigns were also waged in Serbia, where Fructal, the Slovenian non-alcoholic beverage producer, was accused of selling radioactive fruit juices, and in Croatia, where reports of an alleged Slovenian plot to take over Croatia's tourist facilities sometimes verged on nationalistic hysteria. Although these events could be brushed aside as relatively unimportant and exaggerated incidents, it is nevertheless true that they entailed significant costs to the firms concerned, either in terms of reduced sales or damaged reputations. But it is the latest proposals from Slovenia's president, Mr Janez Drnovsek, that best illustrates the wide gap between politics and economics that characterizes Slovenian foreign and economic policies. The proposal that outlines the future status of the Serbian province of Kosovo and suggests that the only real option for Kosovo is its independence was bound to enrage Serbian politicians notwithstanding guarantees affording Kosovar Serbs and Serbian sacral objects a measure of protection. Some observers have already complained that Mr Drnovsek's proposals will make it harder for Slovenian firms to participate in the Serbian privatization process and warn that consumer attitudes towards Slovenian products may change radically. Just another case for a bit of the almost non-existent Slovenian trade diplomacy?