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What a Tomato Can Tell us about the Euro

22. March 2013, von Adriaan Schout, Comments (0)

In order to form an opinion on the effects of the euro, we could start out from a simple question: what sort of impact had the introduction of the euro on a specific product, let us say a tomato, that a country (e.g. the Netherlands) cultivates and exports? The Netherlands has a strong horticultural sector. At first sight, it seems as if the Dutch exports in horticultural products have benefitted greatly from the euro. In 2010, almost 10% of the workforce worked in the production, knowledge development and trade of vegetables and fruits. 75% of the exports of tomatoes, cucumbers, paprika, etc. were within the EU. Exports within the EU have benefitted from European integration since 1992 with the removal of trade barriers, the definition of common food laws, the protection of patent rights and the introduction of the euro. Since the introduction of the euro in 2002 the exports of vegetables and of fruits have increased massively with 90% and more depending on products and regions. Exports to southern European Member States have proven to be particularly impressive with a growth of 241% between the introduction of the euro and 2010. Does this mean that the euro was a big success?

There are many reasons for this sharp increase in exports from the Netherlands and for the increasing imports by the southern Member States. One explanation for the favourable exports between 2002 and 2010 was the introduction of the euro. Tomatoes and related products are bulk products with low margins. Hence, the export success depends on enormous volumes combined with low profits margins. As a result, small changes in costs result in major changes in trade. The introduction of the euro contributed in two ways to the export success. The euro implied lower transaction costs, and lower costs with bulk products imply more exports. In addition, the economic conditions in the southern countries was inflated due to investments in housing, the inflow of cheap capital and high consumption. There were few incentives within the eurozone to lower wages and prices. As a result, Dutch horticultural exports to southern Member States flourished and investments in production went up, meaning that the success of the Dutch production and exports was partly a sign of failing market adjustments in the south.

Evidently, this upswing in Dutch exports has had its flip sides. Production in the south was pushed back before 2010. At the same time, investments in the Netherlands had gone up leading to the current overcapacities. These days, Dutch export of tomatoes within the EU is dropping. At first sight, this might appear to be a logical consequence of the general economic crisis given that consumption is falling in many eurozone countries. What is much less realised is that it is also the introduction of the euro that can partly be blamed for the present economic setback in horticulture. Currently we see wages in southern eurozone countries dropping, production and export of horticultural articles from the south are increasing, and, as a result, imports from the Netherlands drop and exports to the northern countries increase. Dutch export is not only dropping towards southern countries but also towards countries like the UK due to stronger competition from southern tomatoes.

Looking back, it would have been better had the market for horticultural products remained more in balance. The success of the exports was in part the result of failing markets within the eurozone. Would markets have adapted more smoothly, exports from the Netherlands would not have grown so fast and this would have prevented overinvestments and less adjustments once the crisis set in. Similarly, production in the south would have increased earlier had markets been more flexible.

This shows that the introduction of the euro – a macroeconomic development – resulted in microeconomic imbalances in the market for horticultural products. Looking back, the increase in Dutch exports following 2002 was too high and is now followed by a reversal of trade flows. The story of the tomato tells us that the increase in exports due to the euro was also a sign of insufficient adaptations in the south and has resulted in a hard landing that could have been prevented had the euro not functioned as a ‘sleeping pill’ to postpone market adaptations. At the same time, export surpluses were not matched by adaptations in exchange rates so that adaptions in the end have been more abrupt. What goes up must come down. Paradoxically, the euro has aggravated the ups and the downs. Like it or not, the well-functioning of markets is even more important with the euro.

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Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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