EU to feel the pinch from Russian fruit sanctions
Deutsche Bank analysts lower EU inflation forecast due to embargo, write Michel Rose and Wiktor Szary
PASCAL Sauvetre, an apple farmer in Poitou-Charentes on France’s Atlantic coast, has a headache beyond the usual concerns about weather and tree fungus — Polish apples.
As the European Union’s (EU’s) second biggest apple producer, Poland has some 700,000 tonnes of the fruit it usually sells to Russia but cannot, because Moscow has a food embargo on many EU and US goods as part of tit-for-tat sanctions related to the Ukraine crisis.
Many of those Polish apples will inevitably head for western Europe, potentially displacing their more expensive European rivals. Others will go to markets in Asia and the Middle East, traditionally supplied by EU countries such as France.
“What’s really sending shivers down my spine is the ricochet effect,” says Mr Sauvetre, sales manager of Pom’ Deux-Sevres co-operative. “These apples from eastern Europe that can’t be sold to Russia and will be sent to western Europe — it’s obvious it’s going to hurt, a lot.”
Apples are just one element in an unfolding problem for Europe’s farmers and its central bank policy makers.
From Polish apples to French pork and Greek peaches, exporters to Russia may either have to slash prices or destroy produce. It is just about the last thing the European Central Bank (ECB) wants to see as it struggles with a flatlining economy and worries about deflation.
George Polychronakis of Greek fruit export association Incofruit-Hellas, for example, watched as some 250 truckloads of peaches and nectarines en route to Russia were halted when the embargo hit. Greece exported 160,000 tonnes of fruit to Russia last year, worth €180m to the crisis-hit EU member.
It is also not just fruit. In total, a million tonnes of pork, poultry and beef will remain on the market (rather than go to Russia).
At the macroeconomic level, this threat of lower prices might not matter in normal times.
Food accounts for about 14% of the basket of goods used to calculate eurozone harmonised inflation. Alone, fruit and vegetables account for just less than 3% the basket.
But these are not normal
These apples from eastern Europe … will be sent to western Europe — it’s going to hurt, a lot
times as far as inflation is concerned. Despite record low interest rates and money pumping policies, eurozone inflation is running at only 0.4% year on year, a number that is way below the ECB’s close-to, but below 2% level and also entrenched in what the central bank considers “the danger zone” under 1%. This is before any major effects from the Russian sanctions.
Deutsche Bank analysts have lowered their eurozone 2015 inflation forecast to 1.1% from 1.2% on the basis of western European food supplies being banned from Russia and producers offloading capacity in the eurozone. They see the effect taking effect from this autumn.
“I think it would have to start pervading core inflation before they (the ECB) freak out. But it doesn’t help,” Deutsche Bank economist Gilles Moec says.
The deflationary potential can already be seen in some places. Scrambling to limit damage on their agricultural sector, Poland and others have asked the EU to draw up plans to withdraw the surplus from the market and compensate farmers.
European Agriculture commissioner Dacian Ciolos has said he would soon announce measures to help support producers of perishable fruit and vegetables.