EUROPE’S newest state was on the receiving end of a blast from the American government as it marked its first birthday last week.

Washington issued a warning to Serbia-Montenegro against allowing the Socialist Party of former president Slobodan Milosevic to become the king-maker in the Serbian parliament following elections last December.

"We are concerned that a new government supported by the Socialist Party would be unstable and unable to lead Serbia effectively in the right direction," the State Department said.

The Socialist Party is officially still led by Slobodan Milosevic, who brought the Balkan region to war and who is currently in prison in The Hague on charges of genocide and other war crimes.

Nationalists, consisting of the Radical and Socialist parties, now form the largest block in the Serbian parliament, and Milosevic’s Socialists have started to take advantage of the bickering among the reformist parties to flex their political muscles.

Even without America’s intervention there would be nothing for the citizens of the new state to celebrate. Serbia-Montenegro remains a country with little in common except a language. It still has no common laws, taxes, flag or coat of arms. While defence and foreign affairs are run jointly, Serbia, with a population of 7.5 million, has remained with the dinar, while Montenegro, population 660,000, uses the euro.

Last August, the federal parliament agreed to harmonise the two republics’ economies in line with European Union expectations. But the unified economic zone exists mostly on paper.

The deterioration of the political situation, especially in Serbia, has resulted in the country failing so far to sign an Association and Stabilisation Agreement with the EU, the first step towards full membership.

Domestically, the political scene in both republics has been marred by internal problems, with Serbia almost paralysed since the murder of Prime Minister Zoran Djindjic last March. Djindjic, a key figure in the reformist movement, was gunned down in Belgrade by forces loyal to Milosevic.

Serbia is also without a president because three attempts to elect one have failed due to low turnout. Last week, the Socialist Party voted with three other parties to elect a new speaker of parliament, in return for a promise that they would stop the extradition of war crimes suspects to The Hague.

Vojislav Kostunica, a self-styled "moderate nationalist", who heads the Democratic Party of Serbia, is likely to become Serbia’s next prime minister this week. He has ruled out including the Socialists in government but not the prospect of a deal for their support in parliament. He also says there should be no more extraditions since the war crimes tribunal is "anti-Serb".

If the conditions of Milosevic’s party are met, Serbia faces the loss of key Western political and financial support and a return to the isolation of the Milosevic era. A number of Milosevic associates wanted by the court remain free, including senior military and police commanders. The Hague tribunal wants Belgrade to hand over four army and police generals accused of war crimes in Kosovo.

The US Congress has given Serbia-Montenegro until March 31 to help arrest General Ratko Mladic, the military commander of Bosnia’s Serbs during the war in that republic, or risk losing $100m in financial aid.

Strikes and workers’ protests have become frequent since Serbia’s reformist government launched market reforms which have left thousands of people without work.

Last week, at Zrenjanin, 30 miles north of Belgrade, 150 workers from the local sugar factory, which owes the state more than $10m, pledged to stay in the city hall building until their factory’s future is decided.

Observers expect the union of the two nations to continue for a further two years, the minimum life span agreed in 2003, until an independence referendum by either side in 2006 brings it to an unlamented end.