MASS-MARKET carmakers in western Europe are enduring car sales at their lowest since 1993. They are losing money on their assembly plants in their home countries, yet politics makes it hard to close them. That has encouraged them to seek ways of manufacturing more cheaply in emerging-market states on Europe’s periphery, to drive down their average costs.

Take Fiat, which lost €247m ($327m) in the third quarter of this year. Some 5,700 workers have been put on extended leave in Italy, and even in Poland Fiat has had to shed 1,450 jobs. But its Serbian operation is expanding, and in just over a year has gone from zero to becoming the country’s largest exporter.

Since March, Fiat has taken on 600 new workers and now employs 3,800 at its plant at Kragujevac, a town in central Serbia. Local suppliers to the plant have taken on a further 1,200 recruits. Fiat has invested €1.2 billion in the plant, which now turns out 600 of the company’s chunky, family-friendly 500L small cars each day.

The region was so badly hit in the 1990s by the collapse of Yugoslavia, followed by sanctions and war that it became known as hunger valley. But it had an industrial legacy in Zastava, maker of Yugo cars and Kalashnikov rifles. In 1989, the last full year of the old Yugoslavia, 180,950 cars rolled off the production lines. In 2004 Zastava produced only 13,300 of its ropy models.

What saved Zastava from oblivion was its links to Fiat, which dated back to 1954. In 2008 the assets of Zastava were transferred to a new company, Fiat Automobili Srbija (FAS), owned 67% by the Italian firm. Since then, the old Zastava plant has been demolished. In the new one, workers with an average age of 30 move around silently, tapping instructions into computer terminals that control the plant’s robots.

The rationale for producing in Serbia is cost: the wage Fiat pays there is a fifth of what it pays in Italy, and a third of what it pays in Poland. Last November, however, protests from disgruntled workers forced Fiat to increase wages in Kragujevac by 13%.

The Serbian government subsequently agreed to compensate Fiat for this by paying it €10,000 for each employee it took on—not the first time a government has had its arm twisted by a carmaker into providing subsidies. It also promised Fiat a further €3,000 per car to make cheaper 500Ls for the Serbian market. France and rival car importers cried foul, and the European Commission ruled that Serbia, a candidate for European Union membership, had indeed violated state-aid rules. The car-price subsidy was abandoned but the cash-for-workers one was not.

The plant could make 200,000 cars a year but its production will be lower. One reason is that Serbia failed to persuade Russia to include cars in a free-trade agreement struck in 2011. Kragujevac has good transport links and is close to Fiat’s main European markets. The government would like to encourage more such investment, because too much of Serbia’s measly economic growth since 2008 has been achieved without creating jobs.

How annoying, then, that one of the advertisements made to publicise the 500L in America shows the cars arriving as women strip off their outer garments to the cry of: “The Italians are coming!” If only potential American investors knew that these “Italians” are really Serbs.