Will the EU Wine Reforms Work?

The September 2009 issue of Decanter arrived today and it features three articles about the European Union wine reform regime that went into force last week (on August 1).  I wonder if the reforms will work and dry up the EU’s wine lake by making this important economic sector more competitive?

The EU wine regime is part of the larger Common Agricultural Policy (CAP), which is not so much an agricultural policy as an incomes policy — a set of regulations and subsidies designed to support the incomes of European farmers. The CAP payments have provided income security and, in some areas, social stability, for regions where winegrowing is a marginal economic activity, but where there are few viable alternatives.

Bottle Shock

The subsidies have also served to delay what we now see as inevitable structural adjustment to a declining EU domestic wine market. The new reforms are meant to pull out the props and force adjustment. It’s not exactly shock therapy, but it will have some of the same effects.

You can see the problem if you just look at some of the vineyards in Spain and the South of France where the surplus wine originates. Many of the wines that are produced are poor products, without much market potential, which flow the into EU wine lake and end up in crisis distillation. These winegrowers need to get into a different business. Structural adjustment in this circumstance doesn’t mean changing from grapes to olives or some other crop, however, it probably means selling out, packing up and moving to other regions, a very expensive and disruptive process for both the individuals and their communities.

It’s like an economic Dust Bowl; if you have read  The Grapes of Wrath you know what I am talking about. No wonder there is so much opposition and foot-dragging.

The current economic crisis both compounds and confuses the problem. Solving the long term problem demands that crisis distillation disappear, for example, but the short term crisis makes a case for keeping the price supports just a little bit longer. With the Cash for Clunkers program so popular right now it is hard to rule out Cash for Carignan on principle alone. It is difficult to know how these political and economic forces will shake out in the future.

Label Laws

The first evidence of the new EU regime will show up on the labels of some European wines quite soon.  AOC (Appelation d’Origine Controlée) is being replace by AOP (Appelation d’Origine Protegée) on French wine labels, for example, and Vin de Pays wines will now be labeled Indication Geographique Protegée as EU standard terminology in introduced.These changes will confuse some buyers, I think, but the damage shouldn’t be too severe.

The Decanter story uses the English versions of these new classifications: PDO (protected designation of origin) and PGI (protected geographical indication). The PIG wine acronym is thankfully avoided.

More useful is the fact that wine producers will be able to list grape varietals on their labels, bringing them into line with New World market practice. Since Old World wine consumption continues to fall (and imports of New World wine now crowd European supermarket shelves) leveling the playing field this way makes good sense, even if it is not a perfect solution.

The new label and designation rules are just one part of the EU reform package (other elements including payments for grubbing up and support for export marketing programs), but you have to ask if they go far enough. While labels will be streamlined and made a bit more market friendly fears that hundreds of geographical designations would be eliminated have proved groundless. The confusing thicket of EU wine regions remains and will act as a barrier to supermarket sales, which is where this war will ultimately be fought.

Get Smart

An industry group in the UK that includes Tesco and Bibendum and 23 other retailers and importers want European winemakers to go beyond the EU reform template. They have produced Plan B, which calls for France’s regional wine authorities to set aside their seperate interests and differences and unite to collectively market their wines. The idea is that the French regions don’t compete against each other so much today as they compete with the rest of the world. A united front is needed and regional bickering only gets in the way.

The proponents of Plan B admit that it is unlikely that French producers will give up their local designations and controls and pull together, but they think it is the only way to reverse that country’s continuing decline in the British market. Plan B, whatever you might think of its merits, is about as likely to succeed as any of the “Plan B” schemes in the old Get Smart television series.

The EU is convinced that European winemakers can compete and will compete with New World makers under the new regime. I suspect that are right but, for now, it is too soon to tell.

The wine market has a way of surprising even the most hardened sceptic. Who would have thought 50 years ago that France would be considered a basket case in the wine business? Who would have thought 10 years ago that Australian wine would be considered passé?

I have great respect for innovators in the Languedoc and other threatened EU wine regions. But even with the recent reforms, things could still go either way.

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