* Macedonia's EU progress delayed by Greek name row
* Economic reforms slow to take root
* Some say name row an excuse for government inaction
By Kole Casule
SKOPJE, Oct 1 (Reuters) - Macedonia's high hopes that European Union candidacy status would bring foreign investors to kickstart its economy have long since been dashed, and a dispute with Greece over its name is at the heart of the problem.
The EU entry process would give Macedonia the framework and impetus to reform its economy and give investors greater confidence that they could make money in the small, poor Balkan nation of two million people.
But the two-decade old dispute with neighbouring Greece over the use of the name Macedonia has kept the country on the sidelines of NATO and the EU, and recent attempts by Skopje and Athens to find a compromise have failed.
"Macedonia cannot afford to stay in EU's waiting room for too long, it could devastate the country," a Western diplomat said.
Macedonia was granted EU candidate status in 2005 -- a status that fellow applicants Serbia, Albania and Montenegro have still not achieved -- but Skopje has yet to open membership talks due to Greek objections. In 2008, Athens also blocked the country's entry into the NATO military alliance. By contrast, Albania and Croatia have already become NATO members.
Remaining outside international institutions is clearly taking a toll on one of Europe's weakest economies.
"There is no serious discussion in the country or a long-term plan what to do if this situation continues," said Marjan Nikolov, an expert at the Center for Economic Analysis, a non-governmental organization based in Skopje.
Macedonia's economy contracted 0.6 percent in 2009 and 0.9 percent in the first quarter of 2010, but grew 0.4 percent in the second quarter.
The International Monetary Fund and the government have forecast 2 percent economic growth this year, while the central bank gives a less optimistic view of 0.6 percent. The government projects 3.5 percent growth next year, based on global recovery spurring Macedonia's metal industry and construction.
RELUCTANT INVESTORS
The country badly needs outside investment to boost its production, lower the unemployment rate of around 34 percent and make its products more competitive on international markets.
But foreign investors are reluctant to risk money in a country that many see as politically unstable and an outsider in Europe. In 2009, foreign direct investment fell to 180 million euros ($245 million) from 399 million in 2008 and 506 million in 2007.
Much of the foreign investment is in the telecom sector, with Germany's Deutsche Telekom AG, Slovenia's Telekom and Telekom Austria Group being the sole three mobile operators.
France's Societe Generale and Slovenia's Nova Ljubljanska Banka are among investors in Macedonian banks.
Greeks, who have a controlling stake in the country's sole oil refinery OKTA and in its Stopanska Banka, are still the country's largest foreign investors.
Greece's debt crisis had very little effect on its firms in Macedonia, as its bank in Skopje was well capitalised and it did not hold Greek government debt or rely on the parent bank for financing. The Greek crisis mostly hurt trading, because landlocked Macedonia relies on Greek ports for most exports and imports.
Some experts say local authorities have used the name dispute as an excuse for lack of progress in reforms.
"The last refuge for the government is to say the economic situation is bad because of Greece. That's simply not true," said former Finance Minister Xhevdet Hajredini. "The lack of foreign investment comes from bad economic policy."
Most of the criticism from EU diplomats is over the lack of reforms in the judicial system, the rule of law, public administration and media freedom -- all critical to foreign investors' risk assessment.
Diplomats say the current conservative government led by Prime Minister Nikola Gruevski's VMRO-DPMNE party, which holds 63 seats in the 120 seat parliament, is reluctant to push through painful reforms, fearing a loss of popular support.
Finance Minister Zoran Stavrevski disputes that. "We have very good results in creating a better business climate. Several international institution have praised us for the reforms, even ranked us as top reformers," he told Reuters.
The EU's last review of Macedonia's candidacy, late in 2009, said it had made good progress in fighting corruption. Despite some problems in enforcing legislation, it recommended entry talks should start -- a proposal blocked by Greece. (Editing by Adam Tanner/Ruth Pitchford)