* Outsourced fashion brands can use 'Made in EU' labels
* Cheap transport helps Balkans rival Asia for Europe
* Cost-cutting loophole may damage brands
By Adam Tanner and Maja Zuvela
GJIROKASTER, Albania/TRAVNIK, Bosnia, June 18 (Reuters) - The road to the continent's high fashion boutiques often leads through little-known towns in the Balkans, but you wouldn't know it from reading the labels.
Blerza Kallajnxhi held up a cluster of labels saying 'Made in E.U.' at her factory in Gjirokaster, Albania -- birthplace a century ago of Enver Hoxha, the Communist dictator who isolated Albania from the rest of Europe -- as she explained how she fills orders from abroad.
"We get an order from Greece and they send the material, the model design and the labels," said Kallajnxhi, who bought the small factory in the mountain stronghold of Gjirokaster with her husband two years ago.
Greece -- unlike Albania -- is in the European Union.
In the eyes of many consumers, a product made in Europe might be of better quality than one made in China, Bangladesh or Thailand, where many fashion groups have outsourced manufacturing. But few know what 'made in Europe' really means.
"Nothing says 'Made in Albania,'" said Kallajnxhi. "Of course we are proud of our country, but that's what the client wants."
Global fashion brands are doing nothing illegal in labelling clothes this way, provided the manufacture includes inputs from within the 27-country bloc.
Under EU rules that are obscure to most consumers, goods made in more than two countries are said to originate in the place of "their last, substantial, economically justified working or processing".
It's a loophole that helps cut costs and is now more important than ever, in light of a fall in apparel demand since last September.
But EU-based fashion companies often do not advertise the full extent of their supply chains in lesser-known corners of Europe.
"It is not required that we have to add a label 'Made in Bosnia' though the consumer could inform himself regarding the country of origin by reading a registration number sewn into the garment," Jan Ahlers, vice chairman of the Ahlers AG supervisory board, told Reuters in an email.
German-based Ahlers makes Pierre Cardin suits in Bosnia under licence and is the label's exclusive distributor in Germany, Austria, Switzerland and the former Yugoslavia.
Some consumer groups argue brands should be more transparent about their production, and some luxury groups say such outsourcing is a threat.
"Research shows that consumers' trust in retailers is waning," said Josie Nicholson, founder member of Ethical Fashion Forum which advocates social and environmental sustainability in the industry. "Clear and honest labelling is the best way for retailers to win back consumers' confidence."
BUNKERS
Up the street in Gjirokaster, two cement bunkers remain on a hillside, a remnant of Hoxha's paranoia about the outside world.
"It is ironic that we built these bunkers a long time ago, but we are now in NATO and are partners," said Mustafa Devolli outside his factory making military uniforms for Greece. "We hope not in the too-distant-future to be part of the EU."
Wages in the town are around 170 euros ($235) a month, compared with more than 2,500 euros a month for European Union manfacturing jobs according to Eurostat information for 2006.
Balkan factories can also rival even cheaper labour in Asia because transport to European markets costs less and is faster.
In accordance with current EU laws, factories across Serbia, Albania, Bosnia and Macedonia sew and assemble clothing sold abroad bearing tags saying it has been made in the EU or a member country such as Greece or Italy.
In Travnik, Bosnia, staff at the Borac factory say it produces items for labels such as Hugo Boss, Pierre Cardin and Burberry. In Bitola, Macedonia, the company Pelister says it has sewn brands including Mango and Zara.
Hugo Boss declined to give information about its links to operations operations in the Balkans. Inditex, which produces the Zara line, declined official comment.
Burberry spokesman Graham Biggart said the company does not use "Made in the EU" tags, but labels which show the country of production. A Mango spokeswoman said the company had made clothes in the Balkans in the past but not lately.
"The fact that our label does not appear on products would not be so frustrating if the job was well paid," said Borac General Manager Mustafa Sefer. "But such deals are the only guarantee for us to get products to market and pay our bills."
Textile and shoe manufacturing are vital for the Western Balkans. In Albania and neighbouring Macedonia, such work employs about 10 percent of the workforce, industry officials say.
The Bargala shoe factory in Stip, Macedonia -- the largest in the region -- produces shoes from Italian leather for three to six euros a pair to be sold in stores such as Marks & Spencer, said principal owner Konstadin Barzov.
A Marks & Spencer spokeswoman said "we source a small number of our shoes from Macedonia, but we always label clearly the country of origin."
Balkan textile officials stress the difference between assembly and manufacture.
"If a producer makes an outsourcing deal with an EU-based or registered company to produce a batch of products with the partners' material, design and assembly instructions, then it may have 'Made in EU' label," said lawyer Svetlana Zivkovic at Serbian clothing producer PS.
"Material, drawings, blueprints, everything related enter the country in sealed containers and leave the country in sealed containers. Under such circumstances, everything is essentially made in EU, apart from actual assembly."
OPEN SECRET
But retailers do say abuses have occurred.
"It happens that products that are supposed to be made in Italy, or France or wherever, in reality ... most of the raw materials and most of the work in the manufacturing has been made, for example, outside Europe," said Alessandro Bedeschi, secretary-general of the European Association of Fashion Retailers in Brussels.
Back in Stip, Macedonia, Bargala also sells from its factory to locals. Through an unmarked door in a central courtyard workers sell shoes marked "Scarpe Italiane" (Italian shoes).
Where the practice may risk serious brand damage is in luxury: the industry is one of the last in Europe to have moved production facilities abroad to lower costs because much of a luxury brand's credibility rests on the "Made in" cachet.
"Luxury is about where things are made," Diego Della Valle, chairman and chief executive of Tod's told the Financial Times Luxury Summit in Monaco on Tuesday.
Many clothing firms in the Balkans are reluctant to discuss their work for big labels, fearing this may upset deals just as orders have already fallen sharply due to the economic crisis.
"After finishing the clothes, we put in a neutral label that has no 'made in' on it," said Dimitar Stojanov, owner of the Pelister factory in Macedonia. "That is later applied by the client. What they put, we don't know." (Additional reporting by Kole Casule in Bitola, Macedonia; Benet Koleka in Tirana; Aleksandar Vasovic in Belgrade; Marie-Louise Gumuchian in Milan; Eva Kuehnen in Frankfurt, Astrid Wendlandt in Monaco and Mark Potter in London; editing by Sara Ledwith and Astrid Wendlandt)