eunbil · GT0N1614 · 2006-07-14 00:00:00 — the remainder is divided between private storage of wines and musts (, or 70 million), export refunds (, or 17 million) and the definitive grubbing-up of vineyards (a measure up to now used less and less by the Member States), which should only cost 31 million (in 1993 the figure was in excess of 400 million), less than of expenditure on market organisation. The budget for 2006 is 1 494 million, a figure composed of significant expenditure on crisis distillation decided in 2005 after the abundant 2004 harvest, to which the distillations planned for the 2005 harvest must be added. In addition, it should be pointed out that, like other sectors, wine producers benefit from agri-environmental measures and other structural measures to support rural development, although the wine sector may not in the past have used all the opportunities offered by the EUs rural development policy, opting instead to use intervention and market measures. Strengths and weaknesses of the wine sector Europe can be rightly considered as the birthplace of wine-making. cultivation and wine-making have a millenary tradition: they have been carried out since ancient times, and have constantly been associated with the cultural values that accompanied the development of European civilisation. With such a long history, a considerable amount of technical knowledge and expertise has been developed. European wines have a widespread reputation and are renowned for their quality, authenticity and tradition: geographical indications such as , , Rioja, Chianti, , Tokaj, etc. are very well known tokens of high-quality wine all over the world. Union represents by far the major player on the world wine market. The latest accession of the ten new Member States in 2004 further consolidated the EU"s leadership, and the enlarged internal market guarantees new valuable for the exports of wine-producing countries. Vine-growing represents a high value-added activity, which plays a key role in economic development, employment and the development of tourism (wine routes) in rural areas, particularly at regional and local level. Its positive contribution to the trade balance of wine-producing Member States is also notable. A significant proportion of EU wine production is highly competitive in the world market, and does not have any difficulty in finding commercial outlets, either on the domestic market or for export to non-EU countries, even though the wine market is already quite open to global competition and the degree of border protection is very low. Finally, vineyards are a feature of the landscape of many rural areas, thus contributing to the preservation of an ancient cultural heritage. Examples of these landscapes are typically found along the Danube and the , in the Rhone Valley, on the terraces of Le Cinque Terre (), in Friuli, along the Douro and beside the Balaton. However, wine sector increasingly faces serious difficulties: the current market imbalance between supply and demand in the Community. Recent harvests have increased stocks significantly, leading to lower prices and great pressure for expensive intervention measures such as distillations. a strong and steady decline in consumption over decades, resulting from shifts in social behaviours with regard to nutrition and lifestyle. a loss of competitiveness against so-called "new world" wine-producing countries. This has led, particularly since the reduction in the level of border protection following the entry into force of the Round agreement of 1995, to a progressive erosion of the market share of EU wines, both on the domestic and on export markets. the complexity of the legal framework for wine policy, which constrains EU producers and further weakens the competitive position of wine sector. the lack of attention paid for environmental concerns in the current CMO despite the pressures exerted by wine production. In this respect, many CMO policy tools are probably not effective in achieving their objectives: the effect of the ban of new on curbing production potential has been limited by the granting of new rights and by the increase in yields in some producing Member States. The existence of illicit / irregular has also contributed to the production of surpluses. The use of the grubbing-up scheme has virtually stopped; the restructuring scheme has permitted a move to higher quality wine, but could also have led to an increase in yields; distillations and other market tools, normally designed to absorb conjunctural surpluses, encourage overproduction, thereby preventing market balance. Crisis distillation has been allowed in three out of five years since the beginning of the new CMO, and again this year. Furthermore, some of these measures are not efficient, as they are suspected of having significant deadweight effects; some provisions of the CMO have created a heavy administrative burden (for example in relation to the obligations in terms of wine movements and wine depot registers) and have not always been correctly implemented (regularisation of unauthorised ); measures are often too strict and not flexible enough to allow efficiency and to adapt rapidly to new production techniques, and marketing methods. For example, limiting rights does not allow optimal adjustment of farm structures, whereas producers in non-EU countries are not subject to such restrictions. At the same time, the rigid rules on labelling and on wine-making practices hamper innovation; the present dichotomy between table wines and "quality" wines produced in specified regions no longer provides the appropriate framework to promote the concept of Geographical Indications for wines, both within and outside the EU. In addition to several thousands of QW psr, there are also several hundreds of "table wines with GI"; the labelling rules, which are specific to wine, are characterised by the heterogeneity of legal instruments and the rigidity of certain rules, which in particular make it difficult to develop so-called "varietal wines" (vins de cépage) or state the vintage year outside a GI, and are regularly criticized by third countries. The rules seem in general to be more producer-oriented than consumer-oriented; several policy tools are currently under pressure in the framework of the WTO: this is the case for all market measures, which are categorised under the most trade-distorting support measures (amber box), and the export refunds, for which there has already been a commitment to phasing out under the current Round negotiations. Even some other provisions have been challenged by our partners: the green box classification of the restructuring and reconversion programme, the classification of table wine and quality wine, some labelling rules, the ban on vinification of imported musts and the ban on blending Community and imported wine; although the 2003 CAP reform introduced the principle of cross-compliance for direct payments to agricultural producers, the wine sector is currently excluded from this general system. However, a significant part of the vine area is already covered by cross-compliance, since any wine producer receiving direct payments for areas other than vineyards is subject to cross-compliance for his whole farm (see section 5.3). As wine is one of the products listed in , referring to Article 32, of the Treaty establishing Community, it is up to the Union to lay down rules for the of the common market organisation, and therefore also to address the abovementioned problems. The reform of the wine sector is expected to contribute to the Strategy and should ensure that wine production in the enlarged European Union is competitive and sustainable, and driven by market demand. In particular, the reformed CMO should achieve the following key objectives: to ensure a better quantitative and qualitative balance between supply and demand, by providing for simple and effective rules allowing structural adjustment of the sector, including a reduction of production potential where necessary; to enhance the competitiveness of European wine, by allowing the development of a modern and dynamic wine industry, capable of efficiently producing wine and marketing it on the internal and the world market, thus consolidating EU leadership in the sector; within the general objective of competitiveness, to preserve the authenticity and the traditional character of the product, and to safeguard vineyards in sensitive areas, where vine-growing plays an important role in protecting the environment/landscapes and providing employment in rural areas; to simplify the legislation, by allowing a more effective and flexible framework of rules for production and labelling. In particular, those rules should be consumer-oriented rather than producer-oriented; to take into consideration wider society concerns, such as health and consumer protection and environmental matters; to take into account the accomplishments of the CAP reform initiated in 2003, in particular its market orientation, its horizontal approach and cross-compliance; to fully respect our international obligations; to achieve a higher degree of subsidiarity, leaving to Member States as much scope as possible for national decisions, and allowing Community action where the objectives cannot be sufficiently achieved by Member States. This should enable Member States and wine regions to adapt the measures available at Community level to their precise conditions and needs, albeit under certain common rules in order to avoid distortion of competition; to provide for the smooth integration of and into the EU wine market organisation, enhancing the process of modernisation and restructuring of their wine industries. Taking into account the preliminary analysis of the strengths and the weaknesses of the EU wine sector, the problems that have emerged with the existing wine CMO, and the objectives to be achieved by the EU wine policy, four alternative reform options have been identified. Option 1: Status quo, with possibly some limited adjustments This reform option consists in maintaining most of the tools of the existing CMO, with just some specific provisions to overcome the most important problems. The tools for the management of production potential would be substantially kept in place: the ban on new would be extended beyond 2010; the tool of permanent abandonment would be also kept as it is now, with scope for wider use by MS, if the market situation should require it; the policy of restructuring and reconversion of the vineyards would continue, possibly with some adjustments to overcome the current problems (stricter control that the measure is not used for normal renewal of vineyards and/or that it does not lead to increased yields; improvement of the monitoring tools put in place to assess the effectiveness of the scheme). The market measures, in particular distillations, would continue to play their central role in the CMO: as far as the distillation of by-products is concerned, this practice would continue to be compulsory in MS currently using it, if they so wish; as for the other distillation measures, either the instruments would be kept as such, or some adjustments would be made to contain expenditure (e.g. a slight reduction in the distillation price for the potable alcohol scheme) or to link distillations to structural measures (e.g. possible mandatory link between crisis distillation and permanent abandonment); private storage and aid for the production of grape juice would be kept, if necessary introducing some slight improvements; aid for use of grape musts for enrichment would be maintained at the current level, despite the pressure to increase its level, due to the reduction in the beet sugar price. No changes would be proposed concerning the use of sucrose for enrichment; export refunds would be phased out in the framework of the WTO commitments. The regulatory measures (wine-making practices, quality policy and the protection of geographical indications and labelling) would remain substantially unchanged. Option 2: Profound reform of the CMO This reform option provides for in-depth revision of all the tools of the CMO, from the pure and simple removal of the least effective ones, to the introduction of new coherent tools acting in synergy. Nevertheless, the CMO would still preserve its specific character. Market intervention measures, and in particular distillations, are suspected, despite their cost, to have been ineffective in reducing the structural surpluses of wine production in the long run. Therefore, one could envisage shifting the emphasis from that kind of tools to structural measures aiming at establishing market balance. Since recurrent production surpluses are a feature of the wine market, the tools for limiting the production potential would be kept in place and reinforced: extension of the ban on new for a few years beyond 2010; however, once the situation of the wine market improved and reached equilibrium, the ban would be lifted; strengthening of permanent abandonment scheme, in order to reduce global production potential, particularly that of vineyards that do not have a market outlet to match their production volume. For wine producers grubbing-up their vineyards direct income support would be provided through the granting of Single Payment Scheme entitlements; continuation of the restructuring and reconversion scheme for vineyards possibly with the improvements referred to under option 1). The need for restructuring should be carefully verified, and, if appropriate, the budgetary amounts allocated for to this measure could be reduced, with the corresponding funds being used for other measures in the national envelope (see below) or transferred to the rural development. Lastly, a link between the restructuring scheme and permanent abandonment could be established, in the sense that higher envelopes could be awarded to Member States making the biggest efforts in terms of grubbing-up policy. All market measures, and in particular distillations, would be in general abolished: the distillation of by-products could be made voluntary for wine producers (but with no financial support from the Community), even though the prohibition on overpressing marc and lees (with the limit of minimum alcohol content) would be maintained under WMP rules; crisis distillation would be abolished, or replaced by an alternative safety net mechanism using a national envelope; dual-purpose grape distillation and potable alcohol distillation, together with private storage and must aid would be completely abolished; in order to guarantee fair competition between EU producers, in tandem with the abolition of the support for must, a more restrictive approach to using sucrose for enrichment should be adopted. The proposed restriction would consist in a complete ban on the use of sucrose; export refunds could be abolished in connection with the WTO commitments, possibly in favour of promotion, information and education measures. The part of the current budget for market measures not earmarked for permanent abandonment would be distributed in the form of a national envelope or transferred to the second pillar as an additional envelope for wine-producing Member States and regions. The national envelope could be used, in with greater subsidiarity, for a certain number of eligible measures, subject to certain common rules in order to keep them consistent with the objectives of the reform and to avoid distortion of competition. Possible measures contained in the envelope would be, for example: the restructuring and reconversion scheme, tools providing support for safety-net mechanisms (aid for the administrative set-up costs of a sector-specific mutual fund, instruments to alleviate natural disasters, basic coverage against income crises, etc.), support for green harvesting. The funds shifted to the second pillar would provide additional resources for rural development policy in the wine regions, as was the case for the reform of the tobacco sector, for example to strengthen early retirement measures for wine producers or to reinforce the agro-environmental dimension of vine-growing, for example introducing a cultural landscape payment for vine areas with a specific and recognised environmental/landscape value, which could otherwise be endangered, or funding environmentally-friendly production methods, such as organic and integrated crop management (ICM). For wine-making practices, apart from the problem of enrichment, which was already analysed in connection with the market measures, the following amendments would be proposed: simplifying the process of approval of wine-making practices through the transfer of competence from the Council to the Commission, recognising OIV () practices, with filtering at Commission level for their incorporation into Commission regulation, authorising wine-making practices for export to countries accepting them; ending the ban on vinification of imported musts and on blending Community wines with non-EU wines A geographical indication (GI) system, specific to the wine, would be kept; however, this system would be improved making it more consistent with the general system of Protected Geographical Indications and Protected Designation of Origin (PGI/PDO) and aligning it to the provisions of the WTO-TRIPS agreement. This could entail a revision of the EU classification system for wines. Finally, labelling rules should be simplified by creating a single legal framework for all the different categories of wine, thereby making labelling policy more flexible and adapted to the needs of consumers. Closer links to horizontal rules on compulsory particulars could also be envisaged. A possible variant of option 2, Profound reform of the CMO could be a more resolute approach, lifting the ban of new immediately, together with market measures. As a consequence, the grubbing-up programme would be abolished, and the whole budget would be transferred either to the national envelope or as an additional envelope to rural development measures in wine-producing Member States and regions. Compared to the basic option, this variant would tend to require harsher adjustment efforts for the wine sector, since it contains some pronounced aspects of deregulation. However, with respect to the option 4 mentioned below, the impacts of this variant would be much more mitigated, due to the availability of considerable budgetary resources through the national envelope and the reinforced rural development policy for restructuring the sector. Option 3: Reform along CAP reform lines This reform option provides for the integration of the wine sector in the mainstream CAP, as reformed since 2003. The entire budget for the wine sector would be converted into Single Payment Scheme (SPS) reference amounts to be distributed on a hectare basis. Vines would be made eligible for the activation of SPS entitlements and would be subject to the general system of cross-compliance, modulation and financial discipline. The ban on new would be extended for a few years beyond 2010 as under option 2, however, once the situation of the wine market improved and reached equilibrium, the ban would be lifted. The policy of permanent grubbing-up of vineyards would be largely abandoned and the envelope for the restructuring scheme would be transferred to the budget for the SPS. All market measures would be in abolished and the budgets for them redistributed under the SPS. In tandem with the abolition of the aid to must, the use of sucrose for enrichment would be prohibited, as in option 2. For regulatory measures (wine-making practices, quality policy and protection of geographical indications and labelling), the same approach would be followed as in option 2. Option 4: Deregulation of the wine market The option of deregulation would entail the immediate abolition of all policy instruments for the management of production potential and the market measures. In other words, the tools for managing the production potential (the ban on new and permanent abandonment) and the policy of restructuring and reconversion within the CMO, together with all market measures, would be immediately abolished, thus leading to complete deregulation of the sector. The budget would be either suppressed or transferred to the second pillar for Rural Development policy in general. Wine-making practices would no longer be dealt with at EU level, OIV rules being the only regulatory framework. The use of sucrose for enrichment would be nevertheless kept as it is in the present CMO. For geographical indications and labelling rules, the current system would be completely integrated in horizontal schemes (respectively the PDO/PGI system and the horizontal directive on the labelling of foodstuffs). Table : Summary table of the policy options The DG mid-term outlook for the EU-27 wine sector to 2010/2011 (see 2), is that, assuming an unchanged CMO, the wine surplus in an "average" year could be 27 million hl (of production), or to 15 million hl (of production), if wine subject to distillation to support the potable alcohol sector is excluded. Option 1: Status quo, with possibly some limited adjustments Simply fine-tuning the policy tools under the existing CMO is not expected to lead to major positive impacts on the equilibrium of the wine market compared to the mid-term outlook. A reduction in the minimum distillation price granted to producers under the potable alcohol scheme will not produce any improvement in the balance of the wine market, unless the price cut is substantial. As the current distillation price of 2.488/%vol/hl is systematically higher than the table wine price in the regions most interested by this distillation measure, even a lower price would probably remain attractive for the majority of the producers applying for the scheme, so that they would not be forced to adjust the volume of their wine production. The only proposed adjustment that would potentially contribute to alleviating the market imbalance could be the introduction of a compulsory link between crisis distillation and the grubbing-up programme, but the impact of such a link would basically depend on how strict the requirements were, and would in any case be limited by budgetary constraints. Option 2: Profound reform of the CMO Among the policy changes proposed under this option, the following have a direct effect on the market balance of the wine sector: abolition of market measures (in particular distillations); new provisions on wine enrichment (suppression of must aid and ban on the use of sucrose); strengthening of the policy of permanent abandonment; measures introduced under the national envelope or rural development policy. Market measures To achieve a balance in the wine market it is necessary to remove all policy incentives that have led to the current situation of structural overproduction. The key measure is the abolition of the market support, which will guarantee, in the long term, a balanced market situation. However, the cut in production needed to reach equilibrium will occur only following significant structural adjustment in the wine sector. This process could force less competitive wine holdings, currently relying on public support, to abandon the activity, and/or induce producers to reduce their yields in order to prevent overproduction problems. Moreover, the abolition of some market tools supporting the use of wine production, such as potable alcohol distillation, could, in the short term, even cause a greater imbalance in the wine market.