Political uncertainty in two of the euro zone's smallest member countries is threatening more upheaval for the embattled monetary union.
Slovenia, with a population of only 2 million, saw its government collapse in a confidence motion Tuesday – just one week before its parliament is to vote on a much-needed expansion of the euro zone's rescue fund.
And in Slovakia, where opposition to any further Greek bailouts has been fierce, plans to link approval of the enlarged fund to a confidence vote could put both the Slovak government's survival and the fund's ratification in doubt, analysts say.
With any changes to the rescue fund requiring unanimous approval of all euro zone members, there are fears that the political deadlock in these two tiny countries could delay urgent rescue efforts under way in the zone.
"What this highlights is just how fragile the whole thing is," said Carsten Brzeski, senior economist at ING Belgium. "Political developments in Slovenia, a country smaller than the German capital, can now derail the entire euro zone."
Slovenian Prime Minister Borut Pahor's government fell after failed attempts to reform the country's pension system and labour market. Slovenia's president can now select a new candidate for prime minister who would have 30 days to form a majority. If this fails, an election would likely be called in December.
The concern for Europe is that the upheaval in Slovenia will push ratification of the enhanced European Financial Stability Facility (EFSF), originally set for Sept. 27, into 2012. That's a delay that Greece, teetering on the edge of default, may not be able to endure, analysts say.
"Greece would need funds from the new EFSF by the end of the year," said Marco Stringa, European economist at Deutsche Bank. "A delay would definitely be a problem."
The enhanced EFSF faces more obstacles in Slovakia, where Finance Minister Ivan Miklos says the government will tie ratification of the expanded fund to a vote of confidence in the government.
Slovakia's Freedom and Solidarity party, a member of the ruling coalition, is staunchly against the expansion of the fund and will likely vote against it, making the confidence-vote move a "risky gamble," said Michal Dybula, chief economist for Central and Eastern Europe at BNP Paribas. "The fund may still very well be approved in these countries," he said, "but the question is one of timing. When will it happen?"
Slovenia and Slovakia have shed few tears for the euro zone's debt-strapped nations. Both countries implemented difficult economic reforms to meet the criteria for membership in the single-currency area and have shown little patience for others lacking fiscal discipline.
The auto industry drives both Slovenia's and Slovakia's economies and both are heavily dependent on exports to other European countries, so they were hit hard by the economic downturn. Slovenia's economy shrank 8 per cent in 2009 and the country has struggled to bring it back on track.
Slovakia, with more flexible labour markets and strong domestic investment, has fared better, but its anger toward bailouts for other countries is no less palpable, BNP's Mr. Dybula said.
"Slovakia is a much poorer country than Slovenia and is a poorer country than Greece," he noted. "Yet it has still managed to get into the euro zone and comply with all the criteria and conduct massive reforms that were very painful. So the attitude in Slovakia, even more so than in Slovenia, is, 'Why should we pay for someone who has conducted bad policy and on top of that, is a more-wealthy country than we are?'"
Special to The Globe and Mail