But what if the euro zone...

It's a cold Monday morning in November 2012. On the radio, we hear that Greece has left the euro zone. It is a blow to an internal market that just got a little bit smaller; an internal market that has made our lives a lot easier, and not just in the agricultural corners of the Dutch economy. Increased trade thanks to the convenience of a single market; no exchange rate risks; no currency exchange costs; more investment; no legislative surprises; no borders closing from one day to the next for unclear, often politically motivated reasons.

Dutch exports to Greece will suffer, due to the devaluation of the new Greek currency (which some are predicting to be as much as 80% ) and the expected drop in demand to come in its wake. In recent years, Dutch agricultural and horticultural business have enjoyed over 850 million euros per year in exports to Greece, most prominently meat and dairy products - a fraction, it is true (some 1.5%) of the Netherlands' total agrarian output to the EU (over 58 billion euros in 2011), but new markets, some inside and some outside the EU, will have to be found to replace these exports.

Thanks to its currency devaluation, Greek exports have become considerably more competitive, certainly in terms of price. These export products are predominantly citrus fruits, grapes, olive oil, olives and fish, and are not expected to pose much of a direct threat to Dutch firms. In short, the damage to the Dutch agricultural sector from a Greek exit can be considered manageable.

Domino effect...

But suppose that the 'Grexit' opens up the door to more countries leaving the euro zone. Potential candidates are Ireland, Spain, Cyprus, and Portugal, due to their net foreign debt position; and that position is not nearly so unfavourable for Italy . If these countries leave the euro zone, the damage will be considerably more serious - not only in terms of costs for devaluing these countries' debts, but the indirect damages due to the shock waves: falling economic growth, spreading into the countries that remain in the euro, and declining consumer purchasing power. Now the internal market truly does fall apart.

This time the impact on the Dutch agricultural sector is not so easy to ride out. Now we are talking about countries accounting for 7.5% of Dutch agricultural exports. The loss in export revenues could be huge. But just as significant is the potential displacement effect. Consider Spain, a major exporter of fruit, vegetables, meat and fish. After leaving the euro, the Spanish currency could be devalued by as much as 30%. While a large share of Spanish products go to neighbouring countries (France and Portugal), a not insignificant portion also goes to Germany. And Germany is the Netherlands' most important market, with over 30% of agricultural exports going to that country. Of course, not all products compete on price alone, but if there were suddenly a new competitor on the Netherlands' most important export market who could get products to German consumers for 30% less...what then?

And these are just the short-term effects. In the longer term, the dismantling of the euro zone would make banks more cautious (that is, even more cautious than they already have become) on financing innovations in the sector, and make getting loans for business modernisation and expansion even more difficult.

Then what do we do...

The scenario above is a description of what might happen . During the Great Agro Debate 2012, LEI outlined the scenarios above and presented them to an expert panel. These scenarios may raise more questions than they answer. It is important to consider them now, to be better prepared for the potential breakup of the euro zone or, even in a less dire scenario, for at least seven lean years in the euro zone which will see spending patterns drop dramatically.

No matter what the future brings, the credit crisis is already having a major impact on the agro sector. That impact is being felt first and foremost through the banks, which are going to have to be (or already are) must stricter on business financing. A more restrictive financing policy on the part of the banks can stifle the innovation so desperately needed in these economically uncertain times. How do we get this issue on the agenda in the top sectors?