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Restoring the Honor of the Spanish Cucumber

Mises Daily: Monday, June 27, 2011 by

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In the last few weeks, the European Union witnessed a food-poisoning scare that demonstrated the fragile nature of the entire European Union free-trade project. The crisis struck at a time when some EU countries are already in dire fiscal straits, which has provoked exaggerated responses to the outbreak. This article proposes an explanation of the economic forces that have been at play in Europe.

On May 2, 2011, German health authorities reported an outbreak of a severe illness called hemolytic-uremic syndrome (HUS) which is acquired from the E. coli bacteria. Since then, nearly 3,000 cases have been reported in Germany. For nearly a month the German food safety authorities could not identify the origin of the disease. Then on May 26, German health officials started pointing fingers at Spanish organic cucumber farmers.

All the nastiest elements of protectionist nationalism instantly went to work, and a trade wall was built around a series of Spanish industries by their supposed trade partners, including Belgium, Austria, the Czech Republic, and Britain. This trade embargo soon expanded to include not only cucumbers but tomatoes and lettuce, and finally all vegetables from Spain. Then countries like Austria started withdrawing food that had passed through Germany as countries throughout Europe started banning one another's vegetables. Italy deployed the country's paramilitary Carabinieri to hunt down suspected contaminated imports from Spain, the Netherlands, and other European countries whilst the Italian agriculture lobby, Coldiretti, used the outbreak to urge Italians to support their local growers and avoid imports.

Russia then went one step further and banned all vegetable imports from the entire European Union. Saudi Arabia sluggishly followed Russia's lead nearly a week later (despite some countries by this stage having started reversing previous restrictions), deciding to completely ban all fresh and canned vegetables imported from Europe. It is remarkable how an outbreak limited geographically to an area surrounding the city of Hamburg, which led to an initial ban on organic Spanish cucumbers, could end in the complete cessation of all vegetable trade between hundreds of millions of people!

This food-poisoning scare has ravaged Europe's agricultural sector, and losses have already spiraled into the billions. Spain's fruit and vegetable exporters estimate they alone have lost over €200 million ($290 million) a week in sales as 150,000 tons of produce went unsold in a Europe-wide reaction to the outbreak. Spain's already-unmanageable 21-percent unemployment rate began climbing even higher as hundreds were laid off in an agriculture sector that relies on wafer-thin margins.

This industry was one of the few Spanish industries that had not suffered from the recession and was in fact expanding, carrying Spain slowly out of recession. The damage caused to Spain would be akin to that caused by telling Greece that all its beaches carry an airborne version of the bubonic plague! To add insult to injury, Russia has seized the opportunity to realign its trading partners, eagerly calling upon countries like Turkey, Egypt, and Azerbaijan to fill the previously hard-won market share that has been vacated by the now-prohibited European vegetable producers.

Ultimately, as it turned out, Spanish organic cucumbers were cleared of all charges. The E. coli bacteria found on Spanish cucumbers were in fact of a nonvirulent strain and thus harmless. Given that organic cucumbers are nourished by fertilizer derived from manure, or cow feces, is it really surprising to discover some bacteria upon them? Are we not all well-aware that vegetables should be washed? Who doesn't already know this?

Tensions Rise

Spain, the largest cucumber producer and vegetable exporter in Europe, is indignant about the response of the other EU countries, because they reacted before the source of the contamination was established. A Spanish government official said "no EU country can ban a product on its territory. That's up to the European Commission. Germany, Austria and Finland's decisions are completely illegal." The E. coli outbreak has thus triggered trade responses that violate EU law and a plethora of WHO agreements.[1] The WHO even stated it did not recommend trade or travel restrictions, indicating that such measures have no scientific or public-health justification.[2]

What we are really witnessing is the "new protectionism" — that of food-safety standards. The European Union has already been using "health and safety standards" to punish third-world producers for decades. Farming lobbyists have guided protectionism into an increasingly sophisticated and hard-to-measure form. "Quality standards" have become the new trade barriers. For example, EU standards to protect consumers against aflatoxin cost African exporters of nuts, cereals, and dried fruits $650 million a year and reduced their exports by 64 percent. The World Bank estimates that the policy, which is exceedingly costly for many Africans, may prevent one death per billion people in Europe per year.[3]

"By targeting some defect in an imported good, you acquire an excuse to ban it in favor of politically connected producers."

Given that 338 people died on roads in Germany in April alone whilst only 43 people died of the E. coli outbreak during the course of the entire two-month outbreak, one may ask the question: What exactly are the priorities of the German government? Surely, logically speaking, Angela Merkel should be banning her citizens from using roads until they are safe.

Sadly, this phenomenon is as old as commerce itself. By targeting some defect in an imported good, you acquire an excuse to ban it in favor of politically connected producers. In Europe this was most evident between 2000 and 2002 when France imposed a ban on imported British beef after the BSE scare. The ban continued long after British beef was given a definitive clean bill of health. It was only after the EU, to its credit for once, started imposing fines of £100,000 a day on France for its illegal ban that the lockout was reversed.

The Aftermath

The first thing to be thrown out the window in this fiasco was of course the law itself. Under EU food-safety regulations articles 53 and 54, Germany was not allowed to ban foreign imports without the permission of the European Commission.[4] The EU Commissioner in fact openly declared that food restrictions were not to be implemented.[5] One could be fooled into thinking that the law was not mandatory, but merely a guideline.

In Italy, in response to falling Italian-cucumber sales, Coldiretti carried out an antipanic campaign in which it handed out over 10 tons of cucumbers for free in many of Italy's regions on June 4th. Upon being cleared of charges, the Spanish government demanded reparations from the German government for falsely accusing Spanish farmers of harvesting "killer cucumbers."

"We have to restore the honour of the cucumber," said Fransisco Sosa-Wagner, a Spanish MEP. France accompanied Spain in demanding 100 percent compensation.

Ultimately, as it turned out, the outbreak was traced to a sprout farm in northern Germany. With well over 40 outbreaks[6] linked to sprouts over the last few decades, it should come as no surprise.

The EU Agricultural Commissioner defused the situation by stepping in and offering to reimburse all the losses incurred by farmers, while the German government also offered to subsidize the promotion of Spanish cucumbers. Predictably, the floodgates opened on June 3rd as, like locusts, EU member states started scooping up the new taxpayer loot being offered by the EU. The initial offer of €150 million in compensation was promptly rejected as being too small by countries like France, Poland and Slovakia, and ever-larger offers have subsequently been put on the table.

As one could predict, now that the crisis is over, the trade walls appear permanent. Spanish President Zapatero is furious with countries like Russia who are refusing to remove their new restrictions on European vegetables, especially in this time of desperate financial straits in Spain. Ludwig von Mises expressed this so well:

The philosophy of protectionism is a philosophy of war.[7]

Is There a Free-Market Solution?

As mentioned above, there already exist numerous international food-safety agreements, none of which were adhered to during this crisis. With the flouting of EU law by Germany and other EU countries, there are now louder cries to take powers away from national governments, and for a radical strengthening of the European Commission's powers over member states. This, perhaps, would be the logical conclusion if the market was completely incapable of providing an alternative. Fortunately, that is not the case.

Paul Krugman proclaims that "the economic case" for government food-safety regulation "seems overwhelming" because consumers are disadvantaged by their lack of knowledge of markets. This is built on the fallacy that market participants, facing the realities of "imperfect information," have little or no incentive to gain more information for themselves. However, it is the very existence of asymmetric information that creates a demand for assurance services that entrepreneurs quickly fill. Everything from neighborhood gossip to trusted brand names to Underwriters Laboratories to Consumer Reports protects consumers against predatory sellers.

Though food is a product where the consumer must demand the highest minimum level of quality, this only adds to the incentives for private assurance to provide the best service possible. Private companies face a fear of losing their reputation and the goodwill of customers and suppliers, and a fear of lawsuits arising from the sale of contaminated products. Furthermore, the legal position is very clear. Food companies have a legal responsibility to ensure that the food they sell is safe and fit for human consumption. A private-assurance agency would have a survivalist instinct to trace down the origin of any outbreak in record speed.

$16

"We have to restore the honour of the cucumber."
— Fransisco Sosa-Wagner, Spanish Member of the European Parliament

In contrast, as a result of the lethargic and incompetent response of government health officials in this crisis, a group of Spanish farmers is now privately suing the German health authority that proved incapable of undertaking proper scientific analysis. The German taxpayer, not these "experts," is on the hook for any losses. These government-funded health agencies crowd out private alternatives while externalizing costs of enforcement from producers and consumers of specific products onto taxpayers.

As Saint Thomas Aquinas explained, "A small error in the beginning leads to a great error in the conclusion."[8] If you begin with the assumption that the government is needed to regulate food safety, soon social forces and special interests inexorably propel the world into establishing a global food-regulation agency. One must strike at the root of the problem, however, by debunking this initial assumption. It is time for governments to get out of food safety, because, if not for their meddling, the ancient honor of the Spanish cucumber would never have been called into question.

If one of the great founders of the Austrian School, Padre Juan de Mariana of the School of Salamanca, was alive today he would surely join me in this cry against tyranny:

¡Viva el pepino español!

Notes

[1] International Health Regulations IHR (2005) and Sanitary and Phytosanitary SPS Measures (1995).

[2] World Health Organization, "EHEC outbreak: Increase in cases in Germany," June 2, 2011.

[3] Open Europe, "Why the EU must reform to Survive" (2005), p 15.Download PDF

[4] Council Regulation 178/2002, supra note 31, art. 54(1).

[5] Statement by John Dalli, European Commissioner for Health and Consumer Policy on E. coli: 01/06/2011.Download PDF

[6] "German E. coli O104:H4 Linked Epidemiologically to Organic Sprouts," Bill Marler, June 10, 2011.

[7] Ludwig von Mises, Human Action: Scholars' Edition, p. 683.

[8] St. Thomas Aquinas, On Being and Essence (De Ente et Essentia), "Prologue": "Quia parvus error in principio magnus est in fine."