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Trade agreements, EU subsidies and 'crisis' distillations

As expected, the Council of Ministers has prolonged until the end of 2003 derogations on the import of US wines which have undergone oenological practices not permitted in the EU, have been by, just as anticipated. The decision is meant to secure a 'smooth continuation of current negotiations between the Community and the USA towards an agreement on trade in wine'. More surprising, a similar proposition for Australians wines failed to gather enough votes for approval by the Management Committee – a prerequisite for eventual agreement by the Council.
  Earlier, the Commission issued its detailed regulations on trade with third countries. The text bears witness to the fine a line that Brussels is currently treading between its desire to avoid possible market disturbances originating from the outside, and existing international obligations to curb its wine export subsidies. At the same time, the Commission enacted its detailed provisions on the documents that must accompany wines shipped within the EU, and on the records to be kept by the wine trade for their traceability. This is to ensure not just consumer protection, but also payment of excise duties across the Union.
  Together with the rules on the 'description, designation, presentation and protection' of the wines, these regulations will wrap up the new Common Market Organisation (CMO) adopted two years ago. Detailed Commission rules on the designation and labelling of both domestic and imported wines will control the shape of wine bottles and other containers, as well as the nature and the type size of information affixed onto them. The list of permitted geographical indications and traditional expressions is also a vital part of the regulations. Member States still cannot agree on some of the Commission's innovative proposals on labelling table wines bearing no geographical indication, so the regulations are unlikely to emerge before the newly agreed September deadline.
The sorry state of the EU wine market – particularly that for whites – brought the Council of Ministers to grant Portugal permission to add national aid to existing EU subsidies, in an attempt to pump 45 million litres out of the wineries under article 30 of Regulation 1493/99 ('crisis' distillation). The distillation itself was agreed in March. Crisis distillation is a fairly open-ended system as it is subject to no constraints other than the availability of money through the wine budget and approval by the Management Committee. At stake was the much more contentious issue of state aid, which is illegal in principle but can be awarded in 'exceptional circumstances' and on unanimous decision by the Council (Treaty of Rome, articles 87-88). Spain is seeking similar permission concerning crisis distillation of 260 million litres (agreed back in April and later amended to re-introduce advance payments to distillers, because they do not know where to store the distillates anymore). However, the outcome of the 19 June Council's decision on the Spanish request was not known at the time of writing.
  There is more to come: the Italians and the French have just been granted additional crisis distillations for 120 and 150 million litres respectively but, just like the Spaniards, the French want to top the EU subsidy with national funds too. Worse, they would also like to turn 'specific' distillation into a much more effective support measure. (Specific distillation is carried out under article 29 with a view 'to support the wine market by promoting continuity of wine distillates in parts of the potable alcohol sector which traditionally use that alcohol' – ie by subsidising the distillation of wines into potable alcohol.)
  What we are witnessing here is a serious attempt to cling – or even revert – back to the old regime. All in all, the EU Commission will have authorised the crisis distillation of 717 million litres during the first marketing year under the new CMO (45 in Portugal, 50 in Germany, 132 in Italy, 230 in France and 260 in Spain). Adding to this the 'specific' distillations of 1.25 billion litres (closed in mid-December, after oversubscription of the agreed maximum of one billion), this would bring the total figure of EU-subsidised market intervention to about two billion litres, representing more than 10% of wine production. The 'reformed' EU wine regime may now safely burn another few billion litres over the medium term, on a fairly routine basis.
True reform calls for the definitive abandonment of surplus distillation, and focus on raising quality. But adopting an exit strategy, especially after decades of commitment, requires fortitude, and that quality is apparently not the only one in short supply at the moment.
  The rising trend for 'directing research' is another manifestation of the power wielded by money under the cover of necessity, which must be contained. Hence the current regulatory proposals aiming at requesting investment banks to disclose their interests in the companies they cover, and assorted columns about 'lousy analysts' in the financial press. The director of an economic institute confided to me fairly recently that 'being able to write what one thinks, is a real privilege' – a sort of luxury. Well then, I must have been revelling in luxury for 25 years of writing on wine economics, running after the truth and, now, running on empty.

This last column concludes a series of articles on EU affairs – a complement to the book on the international wine trade that addresses these key issues (www.span-e.com for details).

© pierre spahni - first published in Harpers Wine and Spirit Weekly on June 29th, 2001.


Pierre Spahni - Economic Research & Consultancy for Wine - Tel  +41 22 800 1607 Fax 800 1608