PARIS: 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 second biggest apple producer, Poland has some 700,000 tonnes of the fruit it usually sells to Russia but can’t, 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,” said Sauvetre, sales manager of Pom’ Deux-Sevres cooperative. “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 policymakers. 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 that the European Central Bank 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 180 million euros ($240 million) to the crisis-hit EU member.

“They’ll either have to sell it at any price to countries along the way or be forced to bring it back to Greece where it will be destroyed,” he said.

“Oversupply will drag down prices for other goods and that will have a domino effect on the entire market. Even today, I went to the supermarket to buy peaches for myself and they were cheaper than three days ago.”

It is also not just fruit. “In total, a million tonnes of pork, poultry and beef from the EU will remain on the market (rather than go to Russia). It’s a very big blow,” said Paul Rouche, general manager in charge of pork for the French meat trade union SNIV.

Deflation

At the macroeconomic level, this threat of lower prices might not matter in normal times.

Food accounts for about 14 per cent of the basket of goods used to calculate euro zone harmonised inflation. Alone, fruit and vegetables account for just less than 3pc the basket.

But these are not normal times as far as inflation is concerned.

Despite record low interest rates and money pumping policies, euro zone inflation is running at only 0.4pc year-on-year, a number that is way below the ECB’s close-to, but below 2pc level and also entrenched in what the central bank considers “the danger zone” under 1pc.

This is before any major impact from the sanctions.

Deutsche Bank analysts have lowered their euro zone 2015 inflation forecast to 1.1pc from 1.2pc on the basis of western European food supplies being banned from Russia and producers offloading capacity in the euro zone. They see the impact taking effect from this autumn.

“I think it would have to start pervading core inflation before they (the ECB) really freak out. But it doesn’t help,” Deutsche Bank economist Gilles Moec said.

Published in Dawn, August 19th, 2014