EN

Brussels, 22.06.2006

SEC(2006) 770

COMMISSION STAFF WORKING DOCUMENT

Annex to the

COMMUNICATION FROM THE COMMISSION

TO THE COUNCIL AND THE EUROPEAN PARLIAMENT

Towards a sustainable European wine sector

IMPACT ASSESSMENT

{COM(2006) 319}

TABLE OF CONTENTS

Executive summary (...)3

1. Procedural issues and consultation of interested parties (...)4

2. Problem definition (...)7

2.1. Economy of the sector (...)7

2.2. The existing common market organisation in wine (...)9

2.3. Strengths and weaknesses of the wine sector (...)12

3. Objectives (...)14

4. Policy options (...)15

4.1. Option 1: Status quo, with possibly some limited adjustments (...)15

4.2. Option 2: Profound reform of the CMO (...)16

4.3. Option 3: Reform along CAP reform lines (...)18

4.4. Option 4: Deregulation of the wine market (...)19

5. Analysis of impacts (...)21

5.1. Economic impact (...)21

5.1.1. Market balance (...)21

5.1.2. Prices and agricultural incomes (...)24

5.1.3. Competitiveness (...)33

5.2. Economic and social impact on rural areas (...)36

5.3. Impact on the environment (...)38

5.4. Impact on trade and WTO conformity (...)41

5.5. Impact on wine quality, health and consumer protection (...)43

5.5.1. Wine quality (...)43

5.5.2. Health and consumer protection policy (...)43

5.6. Impact on management efficiency (...)44

6. Comparing the options (...)47

7. Monitoring and evaluation (...)49

Annexes (...)50

Annex 1: Mandate of the Inter-Service Steering Group (...)51

Annex 2: Mid-term forecasts for the EU-27 wine sector to 2010–11 (...)55

Annex 3: Impact on prices (...)56

Annex 4: Impacts on agricultural incomes (...)58

Annex 5: List of acronyms (...)61

Executive summary

To address the main problems affecting the EU wine sector, e.g., a structurally unbalanced market situation, the continuous decline in consumption, the progressive loss of competitiveness of the EU wine production, the complexity of the legal framework and the insufficient consideration of environmental concerns in the CMO, four alternative reform options have been considered:

Option 1: Status quo, with possibly some limited adjustments

Option 2: Profound reform of the CMO

Option 3: Reform along CAP reform lines

Option 4: Deregulation of the wine market

The expected impacts of the policy options are summarised as follows.

Option 1, slightly adjusting the existing CMO, would not achieve the objectives of the reform. The status quo appears unsustainable in the long term, because it does neither tackle the problem of the structural imbalance of the wine market, nor enhance the competitiveness of European wine nor improve the consistency with other Community policies.

Option 2, profound reform of the CMO, would address the problems of the wine sector in both the short and long term, by concentrating budgetary resources on measures to achieve smooth and rapid stabilisation of the market and the structural adjustment of the sector. Introducing national envelopes and transferring funds to rural development would leave Member States and wine regions scope to adapt the measures available at Community level to their specific conditions and needs, thus allowing greater subsidiarity.

Option 3, the general introduction of decoupled support for wine producers, would also allow most policy objectives to be achieved in the long term, in particular market equilibrium in the wine sector. Moreover, it would address environmental concerns, since it allows direct application of cross-compliance to the whole vine area. However, as in the case of complete deregulation, albeit to a lesser extent, in the short and medium term the sector would undergo quite a tough adjustment process. Public intervention would mainly focus on supporting farm incomes rather than rapidly improving the market balance by providing help with structural adjustment. Furthermore, an even distribution of public support to the whole vine area would raise problems of political acceptability and of overcompensation of quality wine producers.

Option 4, complete deregulation of the wine sector, would achieve a certain number of policy objectives in the long term, in particular wine market equilibrium and increased competitiveness of wine production. However, the serious adjustment that immediate implementation of this policy would require and the lack of structural measures accompanying this process would produce severe, negative short-term impacts on the sector and the rural economy of the regions concerned as a whole.

1. Procedural issues and consultation of interested parties

Work on this impact assessment on the reform of the Common Market Organisation (CMO) in wine was carried out by an Inter-Service Steering Group (ISG) of the European Commission set up for the purpose in December 2005, and whose mandate is given in Annex 1. The Group was led by Directorate General for Agriculture and Rural Development (DG AGRI).

All Directorates-General (DGs) of the European Commission were invited to participate in the work of the Group, and the following DGs were actively involved in the exercise: the Secretariat-General (SG), Health and Consumer Protection (SANCO), Trade (TRADE), Environment (ENV), Budget (BUDG), Regional Policy (REGIO), Economic and Financial Affairs (ECFIN), the European Anti-Fraud Office (OLAF), Eurostat (ESTAT), and the Joint Research Centre (JRC).

The impact assessment work was carried out in the period December 2005 to April 2006, during which time the ISG held several meetings. Firstly, the current situation of the wine sector was analysed in depth and the main problems of the CMO assessed. Secondly, the group identified the objectives of the wine regime and alternative policy options to achieve those objectives. Lastly, the impacts of the policy options were carefully evaluated. During this process, the ideas formulated by different stakeholders were also taken into account.

To give stakeholders an opportunity to put forward their opinions and ideas on the present situation and future prospects of the wine sector, a seminar, “Challenges and opportunities for European wines”, was held on 16 February 2006. This seminar was attended by more than one hundred people [1] representing a wide range of interested parties, in addition to the members of the ISG. The discussion was structured in three workshops dealing with the following subjects:

1. How to strengthen European wine’s competitiveness in the EU and worldwide?

2. How to achieve a sustainable European wine policy? The contribution of European vineyards now and in the future;

3. European wines and consumers.

In a rich and fruitful debate, stakeholders largely agreed on the preliminary analysis of the current situation and the mid-term forecasts for the European wine sector by the Commission (see Annex 2). Furthermore, there was consensus on the need to keep a specific CMO for wine, but to reform it, in order to find solutions to the difficulties experienced by the sector [2].

In addition to the seminar of 16 February 2006, the Advisory Group on Wine discussed the potential reform scenarios and many bilateral meetings were held between a wide range of stakeholders and the relevant Commission departments.

The Committee of Professional Agricultural Organisations and the General Confederation of Agricultural Co-operatives in the EU (COPA/COGECA) presented a position paper on the wine sector reform on 1 February 2006. They are in favour of a revision of the wine CMO, which should encourage strong economic organisation of the sector based on three main concepts: verticality, co-responsibility and conditionality (mainly to link EU financing and production control).

The "Comité européen des entreprises vins" (representing trade and industry in the wine sector) is in favour of a fully-fledged “wine policy” and in-depth reform of the present instruments. In particular:

– it favours the abolition of the planting ban after 2010.

– it wants to allow table wines without a geographical indication to state the grape variety and vintage year on the label.

Owing to the extreme complexity of the wine sector and to the close interrelationships between single issues, this analysis could not always address all impacts in a quantitative way. This impact assessment remains thus partly qualitative.

Table 1 – Principal features of the wine economy in the European Union

| Year | Volume/Value | Trend |

Wine production value as % of the value of EU-25 agriculture | 2004 | 5.4% | |

Production EU-25 [3] | 2005/2006 | 166 million hl | → |

of which EU-15 | | 160 million hl | |

Production EU-15 | Average | 163 million hl | |

As % of world production | of | 60% | |

of which: | 2000/2001 | | |

France | to | 52 million hl | |

Italy | 2005/2006 | 50 million hl | |

Spain | | 38 million hl | |

Consumption Per capita per year, of which: | 2004/2005 | 131 million hl28.7 l | |

table wine | | 13.9 l | |

quality winenon-EU wine | | 12.9 l 1.8 l | |

TradeWorld production being involved inWorld trade, of which:intra-EU trade | 20042004 | 26%76 million hl48% | |

Imported into EU | Aver. 2003–2005 | 11.3 million hl | |

Exported by EU | Aver. 2003–2005 | 12.2 million hl | → |

Prices | | | |

Average value import (value/volume) | 2005 | € 207 /hl | |

Average value export (value/volume) | 2005 | € 351 /hl | |

Area EU 25 [4]As % of total UAA of EUAs % of world vine area [5] | 2000 (2003) | 3.4 million ha2.2% 47% | → |

Number of farms in EU 25As % of all EU-25 farms | 2000 (2003) | 1.5 million15% | |

Average area (all wine farms) EU-25Of which vine area:Area under table wine for table wine specialists [6]Area under quality wine for quality wine specialists [7] | 2003 | 9.2 ha2.3 ha1.3 ha3.7 ha | |

EAGGF Budget for all vine/wine products | Budget | € 1 228 million | |

As % of the EAGGF guarantee (Title 5) | 2005 | 2.3% | |

2. Problem definition

2.1. Economy of the sector [8]

The European wine sector is the largest in the world. The EU is the world's leading wine producer (45% of vine areas and 60% of wine production), the biggest consumer (60%) and the main actor in the international trade (both the top exporter and the top importer). France, Italy and Spain, which together account for more than 80% of the EU production, are the three most important wine-producing countries in the world.

The wine sector in the EU is composed of 1.5 million holdings (16% of all agricultural farms), utilising a vine area of 3.4 million ha (2% of the total agricultural area) and employing 1.5 million annual working units (15% of agricultural work). In 2004, wine production totalled € 17.4 billion, which represents 5.4% of agricultural output.

Wine production plays a primary role in the agricultural activity of most wine-producing Member States: it represents around 10% of the value of agricultural production in France, Italy, Austria, Portugal, Luxembourg and Slovenia, and a little less in Spain. The importance of wine production in economic activity is even greater at regional and local level: for certain regions the value of wine production exceeds 20% or even 30% of total agricultural production; the percentages can be even higher, when considering more restricted geographical areas.

In addition, for most wine-producing Member States, wine is one of their most valuable export commodities, both for the agricultural sector and for the economy in general. For those countries, therefore, wine contributes significantly to the trade balance.

For many decades now, the European wine market has suffered of recurrent overproduction problems, although the scale of the imbalance (or at least its perceived scale) has risen and fallen over time. During this period, there has sometimes been uncertainty about the structural nature of the market imbalance of the wine sector, mainly because production typically varies significantly from year to year, depending on weather conditions.

Since 1975/76, the problem of overproduction has been addressed by means of a policy of limiting production potential, with a ban on new plantations and an incentive for the permanent abandonment of production through a grubbing-up premium. Those instruments contributed to a substantial decrease in EU vine areas over the period (from 4.5 million ha in 1976 to 3.2 million ha before the last EU enlargement). The reduction of vine areas, combined with a substantial stability of yields per hectare, led to a decline of the total wine production [9] until the mid 90's. In the last five wine years the total production varied between 166 and 196 million hl for the EU-25.

However, the decrease in vine areas was mitigated, from 1996 onwards, by a restrictive application of the grubbing-up scheme and, following the last reform of the wine CMO in 1999, by the introduction of new planting rights. Furthermore, wine production recently felt the effects of a trend towards increasing yields in certain wine regions, notably in Spain, mainly due to the more widespread use of irrigation.

Within this general trend, the share of quality wines psr in total EU wine production has been increasing, and has currently almost equalled that of table wines.

Wine consumption in Europe has seen a significant and continuous decline in recent decades, by an average of 750 000 hl (–0.65%) per year, or 15 million hl (–11%), in the last twenty years. This tendency is the combined result of a sharp fall in consumption (–2% per year) in the traditional wine-producing Member States (in particular France and Italy), where the level of per capita consumption is higher, and a modest increase in the other countries. The falling trend in the consumption has particularly affected table wine, whereas the consumption of quality wine psr is growing. Currently, the total consumption in the EU-25 stands at approximately 130 million hl, almost equally shared between table wine and quality wine.

For other outlets for wine production (grape juices, liqueur wines, brandies, vinegar and aromatic wines), consumption has generally been stable.

Imports of wine from non-EU countries into the Community have experienced extraordinary growth during the past decade: while they played only a marginal role until ten years ago, they are now substantial, having gained considerable market shares at the expense of domestic wines. The reasons for this trend are, on the one hand, the strong development of the wine sector in many countries of the so-called “new world”, in particular Australia, Chile, South Africa and the United States, and, on the other hand, the entry into force of the Uruguay Round agreement of 1995, which has profoundly changed trade arrangements. In particular, the abolition of a minimum price for imports (the reference price) has considerably reduced the degree of border protection. In conclusion, since 1996, the volume of wine imports into the EU-15 has been constantly growing at a yearly rate of 10%, reaching almost 12 million hl in 2004.

In the last ten years, the volume of wine exported from the Community to non-EU countries has been stagnant, and in 2004 it stood at about 13 million hl. On the other hand, the unit price of exports has increased compared to ten years ago; therefore, at least the value of exports grew.

Analysis of the most recent balance sheets for the wine sector in the EU-25 shows that the sector systematically produces a surplus. In the last six wine years (1999–2005), the average vinified production [10] per year in the EU-25 was 174.8 million hl and imports from non-EU countries 9.1 million hl. By contrast, wine consumption was 132.1 million hl; other uses [11] accounted for the equivalent of 16.1 million hl of wine and exports amounted to 11.5 million hl. Therefore, over the last six wine years, wine production has generated on average a yearly surplus of 24.0 million hl wine, or 13.8% of the production. If the volumes distilled under the scheme supporting the production of potable alcohol (on average 11.4 million hl) are regarded as a market outlet of the wine production, although financed by the Community, then the average annual surplus still stands at 12.7 million hl (7.2% of production). This excess volume had to be removed from the market at the expense of the Community budget under specific distillation measures, or it accumulated in private stocks, thus contributing to depressing the wine market situation, and in particular prices.

The problem of surpluses is particularly serious for table wine, but according to the most recent indications, the situation has deteriorated even for quality wines psr (in 2005 and 2006, five Member States requested crisis distillation specifically for quality wine).

The high level of surpluses has led to serious stockpiling and lower market prices, particularly since the abundant harvest of 2004.

The future enlargement of the Union to Bulgaria and Romania will have significant implications for the wine sector, since they are two of the most important wine-producing countries of Central and Eastern Europe, with a joint vinified production of almost 8 million hl on average.

Assuming an unchanged CMO and based on the expected trends in production, consumption and in trade dynamics, the DG AGRI mid-term outlook for the EU-27 wine sector to the wine year 2010/2011 is that the wine surplus will increase to 27 million hl (15.1% of production), or to 15 million hl (8.4% of production) if wine subject to distillation to support the potable alcohol sector is excluded. The differential surplus generated by the two acceding countries is estimated to be 0.5 million hl.

That outlook is for a “normal” year (that is, damping yearly fluctuations in yields) and is based on “average” assumptions.

2.2. The existing common market organisation in wine [12]

The common organisation of the wine market is one of the largest and most complex common market organisations in the common agricultural policy. This is because it covers not only the issues that many market organisations deal with, such as price, intervention and trade, but also issues specific to the wine industry (provisions concerning the production, transport and processing of wine products and wine-making practices).

Community legislation divides wines into two major categories: “quality wine produced in specified regions”, also known as “quality wine psr” (QWpsr), and “table wines” (TW), this category including table wines with and without geographical indications. However, it is the responsibility of the Member States to decide on the definition of quality wine psr, which has resulted in different approaches to classifying wines among the different Member States: Germany, Luxembourg, and to a certain extent the United Kingdom and Austria have opted to classify almost all manufactured wines as quality wine psr, whereas the other Member States have a much stricter approach. This classification does not necessarily reflect the quality of the wines, particularly as some table wines, such as those with a geographical indication (vins de pays, indicazione geografica tipica, vino de la tierra, Landwein, etc.) can rival top class wines in terms of price and quality, whereas some quality wines psr face disposal difficulties and are consequently sold at lower prices on the market. The majority of the market measures provided for by the common organisation of the wine market concern table wines. For instance, QWpsr does not benefit from any export refund. On the other hand, QWpsr is protected by designation of origin (at least inside the EU).

Measures taken by the market organisation can be grouped in three major categories:

· measures concerning production potential,

· market measures,

· regulatory measures.

Measures concerning production potential

The limitation of the production potential is essentially achieved using two types of measure:

· a ban on new plantings (apart from newly created planting rights) and time restrictions on replanting rights (eight years);

· a premium system for the permanent abandonment of wine-growing areas. This measure achieved a substantial reduction in the wine-growing potential of the Union. Since 1996, the impact of this measure has diminished considerably following a change in the Regulation decided by the Council, allowing Member States to exclude part or all of their territory from the system. In recent years, less than 2 000 hectares per year have been definitively grubbed up, whereas at the peak of the system, close to 56 000 hectares per year were affected. Moreover, under the 1999 reform 51 000 hectares of new planting rights were granted;

· a programme of restructuring and conversion of vineyards. The aim of the measure is to adapt production to market demand, to accelerate structural improvement and strengthen competitiveness, by replacing low-quality vines with better quality vineyards and/or improving vineyard management techniques.

Market measures

Under the common organisation of the wine market, distillation is the principal instrument of intervention. The aim of distillation is to withdraw production surpluses from the market at a guaranteed minimum price. The wine is then processed into alcohol, which is intended partly for the potable alcohol market, with the remainder intended for the fuel market. Since the 1999 reform, Community legislation has provided for four different forms of distillation, two of which are compulsory for producers and two voluntary. The purchase price of wine for distillation varies from one type of distillation to the other.

· Compulsory distillation of "by-products of wine-making" aims to ensure the quality of wines preventing overpressing of grape marc and wine lees (this is why the by-products of wine-making sent for distillation must have a minimum alcohol content);

· the second compulsory distillation concerns wines with a so-called “dual purpose", mainly Charentes wine, which, beyond a certain quantity, must be distilled;

· potable alcohol distillation (optional for producers) aims to support the market in wines intended for this type of traditional processing;

· crisis distillation (optional), may be allowed when there is a serious disturbance of the market.

A large part of the alcohol produced by distilling the by-products of wine-making and of wines with dual classification, together wit the entire alcohol of crisis distillation, enters Community public stocks and is disposed of in the EU biofuels sector or for industrial use. For a long time it was exported for use as fuel in non-EU countries. In April 2006, there were 2.5 million hl of alcohol in public storage.

Other measures provide for a private storage system for wine, aid for the use of grape musts for enrichment and for the production of grape juices, and export refunds for table wine and must.

Regulatory measures

These concern provisions on wine-making (or oenological) practices, on quality policy and the protection of geographical indications, and labelling rules.

Wine-making practices (WMP) are the set of technical practices authorized for the production of wine from grapes. They apply directly to wine producers. They are intended to ensure the conformity of the final product and to maintain the quality of the product put on the market, thus protecting consumers against frauds and health risks.

Among WMP, enrichment plays an important role. This practice increases the natural alcoholic strength of wine. It is carried out by adding either sucrose ("chaptalisation") or concentrated grape must.

Chaptalisation is a traditional technique in a large number of wine-growing regions of the north-central and eastern regions of the Community. Elsewhere, this practice is prohibited, and only grape sugar (concentrated must) may be used for enrichment.

Given that chaptalisation costs approximately one third as much as enrichment through concentrated grape must, in order to prevent producers from southern Member States from being penalised by Community rules, support for the use of concentrated must and rectified concentrated must to increase the alcoholic strength of wine was introduced.

The aid for grape must for enrichment, in addition to the direct cost for the budget, has led to an artificial expansion of enrichment (including in regions where the practice was never used before), to a reduction in the natural alcoholic strength necessary to obtain wine and consequently to an increase in yields and production throughout the Community.

Quality policy is intended to maintain a minimum quality standard for QWpsr and to encourage the production of such wines, without an uncontrollable expansion in the production. It also aims to harmonise the provisions of the Member States so as to establish conditions of fair competition in the Community. The protection of Geographical Indications (GI) is an instrument to reach the objectives the EU wine quality policy.

Wine labelling is a legacy from earlier legislation of Member States and has been developed outside the framework of horizontal Community labelling legislation. The objectives of this legislation are to protect the legitimate interests of consumers and producers, to ensure the smooth functioning of the EU Internal Market, to promote the production of quality products and to improve the transparency, openness and clarity of the regulatory discipline of the wine market.

Budgetary expenditure for the common organisation of the wine market mainly concerns table wine. Expenditure varies markedly from year to year due to changes in production conditions and represents between 2.5% and 5.5% of the total expenditure of the EAGGF Guarantee Section. 2005 expenditure amounted to € 1 269 million, distributed as follows:

· 40% represents the direct and indirect costs of the various forms of distillation, primarily distillation proper (€ 321 million) followed by the cost of alcohol in public stocks of three of the four forms of distillation (€ 185 million);

· 35% represents expected expenditure on the restructuring programme in place since 2000 (€ 446 million);

· support for enrichment by means of aid for must accounts for 16% (€ 198 million);

· the remainder is divided between private storage of wines and musts (5%, or € 70 million), export refunds (1%, 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 2% 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 EU’s rural development policy, opting instead to use intervention and market measures.

2.3. Strengths and weaknesses of the wine sector

Europe can be rightly considered as the birthplace of wine-making. Vine 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 Champagne, Bordeaux, Rioja, Chianti, Porto, Tokaj, etc. are very well known tokens of high-quality wine all over the world.

The European 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 prospects 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 Rhine, in the Rhone Valley, on the terraces of Le Cinque Terre (Liguria), in Friuli, along the Douro and beside the Lake Balaton.

However, the European wine sector increasingly faces serious difficulties:

1. 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.

2. a strong and steady decline in consumption over decades, resulting from shifts in social behaviours with regard to nutrition and lifestyle.

3. 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 Uruguay Round agreement of 1995, to a progressive erosion of the market share of EU wines, both on the domestic and on export markets.

4. the complexity of the legal framework for wine policy, which constrains EU producers and further weakens the competitive position of the European wine sector.

5. 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 plantings on curbing production potential has been limited by the granting of new planting rights and by the increase in yields in some producing Member States. The existence of illicit / irregular plantings 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 planting);

· 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 planting 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 Doha 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 Annex I, referring to Article 32, of the Treaty establishing the European Community, it is up to the Union to lay down rules for the establishment of the common market organisation, and therefore also to address the abovementioned problems.

3. Objectives

The reform of the wine sector is expected to contribute to the Lisbon 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 Bulgaria and Romania into the EU wine market organisation, enhancing the process of modernisation and restructuring of their wine industries.

4. Policy options

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.

4.1. 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 plantings 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.

4.2. 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 plantings 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 10% limit of minimum alcohol content) would be maintained under WMP rules;

– crisis distillation would be abolished, or replaced by an alternative safety net mechanism [13] 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 keeping 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 (International Organisation of Vine and Wine) 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 plantings 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.

4.3. 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 plantings 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.

4.4. 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 plantings 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 2: Summary table of the policy options

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5. Analysis of impacts

5.1. Economic impact

5.1.1. Market balance

The DG AGRI mid-term outlook for the EU-27 wine sector to 2010/2011 (see Annex 2), is that, assuming an unchanged CMO, the wine surplus in an “average” year could be 27 million hl (15.1% of production), or to 15 million hl (8.4% 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 20% 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. In particular, ending support for the distillation into potable alcohol would make EU wine alcohol less competitive in the alcoholic beverages market (compared with both alcohol produced from other raw materials and wine alcohol that could potentially be produced in non-EU countries); we can therefore expect some pressure for an overall reduction in the production of wine-based spirits and/or for a substitution in the long term of EU wine alcohol with imports. As a result, less EU table wine to supply this outlet would be withdrawn, thereby creating an additional surplus on the wine market.

The distillation of wine by-products is a different matter. Abolishing Community aid for this practice, while maintaining the ban on overpressing grapes, should not have any impact on overall wine production. Appropriate controls could reduce the risk of fraudulent overpressing practices, which would contribute to a greater imbalance in the market in the short term.

Wine enrichment

The impact of the combined abolition of the aid to must and of the ban on the use of sucrose on the wine market balance is extremely complex and difficult to estimate.

Ending the aid for must would certainly stop the recent trend towards artificial expansion of enrichment in countries or regions, mainly in Southern Europe, where this practice was not traditional. The immediate consequence would be that a large part of the volume of must currently used for enrichment (on average about 5 million hl), would come onto the market of table wine. On the other hand, the less intensive use of enrichment practices would result in an increase in the natural alcoholic strength of wines and, as a consequence, a reduction of yields, for both table wines and quality wines psr.

At the same time, the ban on the use of sucrose in Central and Northern European countries would entail massive replacement of beet sugar by concentrated grape must. This could contribute to a significant improvement of the market balance. According to a 1991 report [14], the abolition of the aid for must and the simultaneous ban on chaptalisation would reduce total wine production in the Community by 6.8 million hl. Although one might argue that positive impacts in terms of the reduction of wine production could be potentially weakened by removing the ban on vinification of must imported from non-EU countries, in reality the entry-price system for must should continue to ensure the protection for the domestic market.

Permanent abandonment

Strengthening the grubbing-up programme under this policy option, provided that the aid is set at an attractive level for producers, has an immediate positive effect on the balance of the wine market, because it directly reduces production potential, and therefore wine production. However, the decrease in production is probably less than proportional to the area abandoned, since it is primarily vineyards with low yields that are expected to be grubbed-up.

National envelope and shifts to Rural Development

As far as the national envelope and the shifts to RD are concerned, the impact on market balance will mainly depend on the mix of measures chosen by Member States; however, some of the measures suggested in the option could play an important role in reducing the wine surplus by enhancing the restructuring of the sector (e.g. early retirement of wine-growers and investment aid) and some other promote at least a better market orientation of production.

Apart from the abovementioned set of tools, other policy measures could indirectly contribute to improving wine market balance: introducing flexibility in wine-making practices and in labelling rules, and setting up promotion projects in non-EU countries, should help expand demand for EU wine by improving its competitiveness (see section 5.1.3).

In conclusion, the combined impact of the above policy changes will certainly lead in the long term to a structural improvement in market equilibrium. The introduction of tools aimed at reducing production potential, namely the policy of permanent abandonment, and other measures encouraging the restructuring, would play a major role in the transition towards the market equilibrium. These policy instruments would accompany the process of structural adjustment of the sector, brought about by the abolition of market measures, alleviating to some extent its adverse short-term effects. At the end of the process, when market balance is achieved, the ban on new plantings could be lifted.

Option 3: Reform along CAP reform lines

Under this option, the only change in policy tools capable of achieving a better market balance, albeit only in the long term, is the abolition of market measures (including the aid for must and related provisions linked to wine enrichment), the impact of which was analysed under option 2.

Therefore, in the absence of measures supporting a cut in production potential (or an expansion of demand) and structural adjustment of the sector in the short term, the transition to market equilibrium, prompted by the abolition of the market measures, would be slower. This would produce more intense suffering for the sector, which has relied for many decades on traditional market intervention instruments and would now have complete responsibility for adjusting to the changed market situation. The positive impact generated by greater flexibility in wine-making practices and in labelling rules in terms of improving the competitiveness of wine production would not be sufficient to alleviate the sector’s short-term problems. However, as it is the case for option 2, a situation of market balance would eventually be achieved, therefore the ban on new plantings would then no longer be meaningful.

Option 4: Deregulation of the wine market

Assuming deregulation of the wine market, the two main policies having a direct impact on market balance are the termination of the market measures (including aid for must) and the abolition of the ban on new plantings.

As mentioned under options 2 and 3, abolishing market measures is an efficient way to achieve equilibrium between supply and demand in the long term, but would trigger abrupt structural adjustment in the wine sector.

Removal of the ban on new plantings would be initially involve a risk in terms of greater market imbalance, since there would be no limit to the expansion for the most efficient producers, thus possibly leading in the mid-term - as soon as the new vineyards would enter into production - to an increase in wine production. Of course, in a long term, the wine market would again reach equilibrium between demand and supply, but, until then, the abolition of the ban on new plantings would amplify the restructuring needs of the wine sector and therefore the difficulties of the market.

5.1.2. Prices and agricultural incomes

Option 1: Status quo, with possibly some limited adjustments

Long-term impact

The fragility shown by the wine market in the recent years proves that the sector is too dependent on Community support and that the system is unsustainable. The growing surpluses forecast in the mid-term outlook for the wine sector to 2010/11 (see Annex 2) will generate increasing pressure on intervention measures and on the corresponding budget. It will be increasingly difficult to clear the growing wine stocks rapidly and effectively using market tools. Recurrent crises would entail a progressive decline in prices, and consequently in farm incomes.

In this situation, “cosmetic” reform of the CMO would be inadequate.

Even in the scenario of an “improved” status quo, the proposed linkage between recourse to crisis distillation and the grubbing-up policy, due to the limited size of the budget envelope, could only result in minor improvement in the market balance and therefore also in prices and agricultural incomes. On the other hand, the slight reduction proposed in the minimum price to producers for potable alcohol distillation would not make the measure more effective, but simply reduce the cost of support for distillation that would take place anyway.

Short-term impact on prices

Of course, the short-term impacts on prices and incomes would very much depend on the conjuncture. In order to make the different policy options comparable, we assume “average” conditions for each of them.

In order to simulate the short-term impact of the status quo scenario on wine prices, and hence agricultural incomes, we link price development to the forecast development of wine stocks. In this respect, the following assumptions are made:

– on the basis of the mid-term forecasts presented in the Annex 2, the structural surplus generated by the wine market in a “normal” year would be 15 million hl (excluding the volume of wine distilled under the potable alcohol distillation scheme). In a status quo scenario, this surplus could be partly removed by dual-purpose grape (2 million hl) and crisis distillation, but the remaining volume would accumulate in the form of additional wine stocks;

– although crisis distillation is not always been applied, and its use varies significantly from one year to another, between 2000 and 2005 an average of 4 million hl wine per year was distilled. Distilling greater volumes in future would not be feasible from a budgetary point of view.

Hence, the surplus generated by the wine market would lead on average to an annual increase in stocks of 9 million hl (15 – 2 – 4 million hl).

Subject to those assumptions, it is possible to give a rough idea of the scale of the impact on table wine prices through simple regression analysis, in which the average annual prices of table wine in the EU are related to the level of wine stocks over the period 2000–2005 (more details on regression analysis can be found in Annex 3).

The annual price data for the EU are calculated as the weighted average [15] of the annual table wine price in France, Italy and Spain, where those annual prices are calculated respectively as the average of the weekly quoted price.

On the basis of the statistical relationship between table wine prices and total wine stocks, and assuming that the level of stocks in “year 0” of the reform is equal to the average for the period 2000–2005, the decrease in average wine prices resulting from an increase of stocks of 9 million hl is estimated to be about 6% [16].

After a further increase of wine stocks of 9 million hl the following year, the price decrease, compared to the initial value at the beginning of the “year 0”, would be around –12%. Prices would be therefore quite low.

In the context of a general fall in prices, table wines would be probably most affected, since they are the main beneficiaries of distillation measures, but it seems unlikely that the quality wines sector could be spared from the downward trend in prices.

Short-term impacts on agricultural incomes (detailed results can be found in Annex 4)

The forecast price drop would also have a direct impact on agricultural incomes. We will mainly focus on table wine producers, who are the main beneficiaries of the market measures and therefore most affected by an unfavourable market situation.

To assess the scale of the impact on incomes, a microeconomic analysis has been carried out, based on information from the Farm Accountancy Data Network (FADN). To this end, seven “model farms” were built to represent the most typical table wine producers in five of the largest wine-producing EU regions (Poitou-Charentes, and Languedoc-Roussillon in France, Puglia and Sicilia in Italy and Castilla-La Mancha in Spain).

For each of these “model farms”, based on 2003 FADN data, all relevant information was analysed, both concerning structural features (total utilised agricultural area, vine area, other crops, family labour and paid labour in the farm) and economic results (output, subsidies, costs, farm net value added and family farm income). The income indicator used for the analysis, which is the most common for agricultural activity, is the Farm Net Value Added per Annual Work Unit (FNVA [17]/AWU).

Assuming unchanged farm features, and notably a constant cost structure (static approach), the economic results of the model farms were projected to “year 0” of the reform. In doing this, it was acknowledged that wine prices in 2003 were particularly favourable; therefore they were replaced by the average price recorded in the period 2000–2005. For that reason, the farms considered in the “year 0” are less profitable than in the base year 2003.

Once the economic results of the wine farms for the “year 0” were obtained, the FNVA/AWU for the two following years was simulated; this was calculated by applying, to the wine output in the “year 0”, the forecast price drop.

The results of this simulation exercise indicate that the price decrease would have a very significant impact on agricultural incomes, which would, after the first year, fall by between 5% for non-specialised table wine producers in Sicily and 19% for table wine specialists in Languedoc-Roussillon. After two years, agricultural incomes in those two regions would decline respectively by 11% and 39%.

However, it is important to note that, due to the static approach (unchanged farm feature and constant cost structure), the method tends to overestimate the fall in income, because it does not consider any economic adjustments by the farms.

Graph 1: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 1

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Source: DG AGRI – FADN

The explanation for the generally sharper fall in income in Languedoc Roussillon is that, as those farms are highly specialised, they are completely dependent on the wine market situation. Moreover, despite being currently more profitable than their Italian and Spanish counterparts, French producers have higher production costs and a higher ratio of costs to revenue, due to the nature of their business, which is more capital-intensive; if those costs are not covered by a certain level of income the production, they risk becoming a heavy burden.

By contrast, farmers in Southern Italy and in Castilla-La Mancha manage, despite the relatively heavy income losses, to maintain a certain profitability, due to their low-input production system.

Option 2: Profound reform of the CMO

Long-term impacts

As was previously mentioned, the abolition of market measures would lead in the long term the wine sector to market balance. This long-term equilibrium can be expected to be mainly achieved by production falling into line with demand, rather than through a downwards adjustment of wine market prices. Apart from yearly production fluctuations due to climatic factors, the level of wine stocks would then be stable over time.

For those reasons, prices and agricultural incomes would reach satisfactory levels and could be comparable to those in the best years under the existing CMO, when the surplus recorded (excluding wine distilled under the potable alcohol distillation scheme) was close to zero. In this situation of market balance, the conditions for abolishing the ban on new plantings would finally be met.

Conjunctural problems linked to occasional surpluses generated by exceptionally abundant harvests, could be tackled through measures supporting safety net mechanisms under the national envelope.

Short-term impacts on prices

It was mentioned above that abolishing potable alcohol distillation could worsen the wine market balance in the short term. Moreover, and more important, the ending of all market measures would mean that production surpluses could not be physically removed from the market through specific distillation measures, but would invariably accumulate as additional stocks, which would have the effect of depressing prices and consequently agricultural incomes.

On the other hand, strengthening the grubbing-up programme to reduce production potential, and providing new incentives for restructuring the sector under the national envelope or rural development policy, would accelerate the adjustment of production and the reduction of production surpluses, thereby diminishing the short-term accumulation of wine stocks.

Although it is virtually impossible to quantify exactly the combined effect of the proposed set of measures on short-term trends in wine stocks, some assumptions are made to link such trends to the possible development of wine prices and hence of agricultural incomes.

– on the basis of the mid-term forecasts presented in Annex 2, the immediate abolition of the distillation measures would mean that the structural surplus generated by the wine market in a “normal” year would increase wine stocks by 15 million hl;

– due to the disposal of less wine for distillation to potable alcohol, an additional surplus volume would be generated. As the market in wine-based spirits is well established, but on the other hand the loss of competitiveness against alcoholic beverages based on other raw materials and/or potential future substitution by imports of cheaper wine alcohol from non-EU countries could seriously reduce the uses of EU wine for the production of distillates, it could be supposed that this additional surplus could amount to 4 million hl, which would be also accumulated in the form of new stocks;

– following the abolition of aid for must and the simultaneous ban on chaptalisation, we assume that the replacement of beet sugar by concentrated grape musts would produce a reduction of 6.8 million hl in total wine production (see section 5.1.1);

– the reinforcement of the policy of permanent abandonment and the restructuring incentives provided under the national envelopes would encourage less competitive producers to leave the wine sector. We could assume that grubbing-up alone would allow the abandonment of 80 000 ha of vineyards per year, which could reduce wine surplus by approximately 3 million hl. The other structural measures under second pillar reduce it by further 1 million hl.

Omitting, for simplicity’s sake, the smaller possible impacts of other proposed measures, we could estimate that, under this policy option, the surplus generated by the wine market in the first year after reform would lead on average to an increase of stocks of 8.2 million hl (15 + 4 – 6.8 – 4 million). In the second year of the reform, wine stocks would continue to increase, but “only” by 4.2 million hl (8.2 – 4 million).

On the basis of the same regression analysis made for option 1, relating table wine prices to total wine stocks, the decrease in the average table wine prices produced by the trend in stocks is estimated at 5% in the first year and 8% after two years. Prices would be at a low level, but still better than in the status quo scenario, and with prospects of short-term recovery, given the favourable trend in stocks.

Again, table wines would probably be most affected by the price drop, but quality wines would probably be affected by the general downward trend as well.

Short-term impact on agricultural incomes (detailed results can be found in Annex 4)

The same method based on model farms as under option 1 was followed for option 2.

Following the same static approach, which assumes unchanged farm features, and notably a constant cost structure, the results of this simulation exercise indicate that the price decrease would have quite a significant impact on agricultural incomes, which would, after the first year, fall by between 5% for non-specialised table wine producers in Sicily and 16% for table wine specialists in Languedoc-Roussillon. After two years, agricultural incomes in those two regions would decline respectively by 7% and 26%.

The explanation for the different magnitudes of income reduction in the various types of farm and regions is basically the same as under option 1.

Again, because of its static approach (unchanged farm feature and constant cost structure), the method tends to overestimate the fall in income.

Furthermore, another factor determining an overestimation of the income decrease, and specific to this option, is the difficulty to fully include in the model-farm approach the indirect positive impact on income determined by some measures in the national envelopes and in the strengthened rural development policy.

Graph 2: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 2

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Source: DG AGRI – FADN

One final comment on the impact on income of the proposed ban on the use of sucrose for enrichment: the effect will be to increase production costs in the wine regions currently making use of this oenological practice. According to the study mentioned above [18], the replacement of sucrose by unsubsidised concentrated must could increase the production costs of that part of German wine production relying on chaptalisation, by 15–25%. This cost increase could lead to a significant income loss. However, it is not straightforward to quantify that income loss exactly, due to the impossibility of simulating cost variations for specific farm production using the FADN, and because of the small size of the German FADN sample of wine holdings.

Option 3: Reform along CAP reform lines

Long-term impact

The same considerations set out for option 2 would be broadly applicable to option 3: the achievement of the market balance would in the long term guarantee that prices and agricultural incomes reached satisfactory levels. In this case as well, once market balance was attained, the ban on new plantings would be pointless. However, the time frame needed to achieve market balance would be longer, due to the complete absence of specific structural measures accompanying the abolition of market tools. On the other hand, the longer adjustment period would be compensated for by a higher level of income in the end, due to the payment of decoupled aid.

Finally, it should be mentioned that no instrument in the CMO would be available to deal with conjunctural overproduction problems, which, due to climatic conditions, occasionally affect the wine sector.

Short-term impacts on prices

As for option 2, ending distillations measures would mean that production surpluses would invariably accumulate as additional stocks, with serious consequences for market prices.

Moreover, in the absence of measures supporting a reduction of production potential (or an expansion of demand) and structural adjustment of the sector, wine stocks in the short term would accumulate more rapidly than under option 2.

Again, some assumptions have to be made in order to link the trends in wine stocks to the possible development of wine prices and hence of agricultural incomes.

– according to the mid-term forecasts referred to above, the immediate abolition of distillation measures would, in a “normal” year, increase wine stocks of 15 million hl;

– additional wine stocks, in the order of 4 million hl, would accumulate due to less table wine being distilled to produce alcoholic beverages following the abolition of the corresponding distillation scheme;

– wine stocks would drop by 6.8 million hl following the introduction of the ban on chaptalisation.

In conclusion, we could estimate that, under this policy option, the surplus generated by the wine market would lead on average to an annual increase of stocks of 12.2 million hl.

On the basis of the same regression analysis made for options 1 and 2, relating table wine prices to total wine stocks, the decrease in average table wine prices resulting from the trend in stocks is estimated at 8% in the first year and 16% after two years, which would lead to the lowest price levels ever.

Again, table wines would be probably most seriously affected, but quality wines would probably be affected by the general downward trend in prices as well.

Short-term impact on agricultural incomes (detailed results can be found in Annex 4)

The same approach based on model farms as under option 1 and 2 was followed for option 3. The only peculiarity of this specific case is that the simulated income must take into account the value of the new decoupled hectare payment received by the wine holding.

Assuming that total expenditure on the CMO is transferred to the Single Payment Scheme, the decoupled payment would amount to approximately € 380 per ha (€ 1 300 million for 3.4 million ha). This direct payment would be subject to modulation.

The results of this simulation exercise indicate that the introduction of a hectare payment would initially at least compensate for (and in some cases would even exceed) the price drop, so that the impact on agricultural incomes would vary, after the first year of the reform, between –3% in Poitou-Charentes and +34% in Castilla-La Mancha. However, the further price drops in subsequent years would lead to a progressive decline income. After two years, agricultural incomes would already be declining everywhere (between –5% for non-specialised table wine producers in Sicily and –17% in Poitou-Charentes), except in Spain.

The reason for the income increase in Castilla-La Mancha is that, given the low yields and the low price of table wine in that region, the level of decoupled payment turns out to be quite substantial for that type of farm.

However, the steep fall in prices from one year to another could mean a decline of agricultural income in subsequent years, so that the main difficulties could occur in the medium term, before market balance is achieved.

Graph 3: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 3

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Source: DG AGRI – FADN

Again, the ban on the use of sucrose would have the same adverse impact on production costs and incomes of Central and Northern European wine regions as noted for option 2.

Finally, distributing the whole wine budget as a flat-rate decoupled payment per hectare of vine area would mean that quality wine producers, even in the upper range, would benefit from direct payments as well. This could make it difficult to accept the system and lead to overcompensation of certain quality wine farms, which might in fact be affected very little by the worsening of the market situation. On the other hand, any alternative system discriminating between quality wine and table wine producers could introduce disparities between single producers, would be technically very difficult to implement and could lose the advantages of a simple and universal approach, e.g., as far as scope for applying cross-compliance rules is concerned (see section 5.3).

Option 4: Deregulation of the wine market

Long-term impact

As mentioned under the previous two options, long-term achievement of market balance is the guarantee that the prices and agricultural incomes will stabilise at a satisfactory level. However, the immediate removal of the ban on new planting rights, combined with the lack of structural measures in the CMO accompanying the abolition of market measures, would complicate the move towards market equilibrium, which would take longer compared with other options.

Furthermore, as in option 3, there would be no instrument to alleviate conjunctural problems linked to the extreme variability of wine production.

Short-term impact on prices

As for the other options, after the abolition of distillations, production surpluses would invariably accumulate as additional stocks, with serious consequences for market prices and consequently agricultural incomes.

Compared to option 3, wine stocks would accumulate even more steadily, due to the proposal to maintain the status quo as far as the use of sucrose for enrichment is concerned (which would prevent production from decreasing). On the other hand, the immediate removal of the ban on new planting rights would not have an impact on production in the short term, but only in the medium term, due to the time it takes for any new vineyards to enter into production.

In short, we could estimate that, under this policy option, the surplus generated by the wine market would lead on average to an annual increase in stocks of 19 million hl (wine surplus including the 4 million hl resulting from the abolition of potable alcohol distillation).

On the basis of the same regression analysis the decrease in average wine prices resulting from the trend in stocks is estimated at 12% in the first year and 23% after two years, which would represent the highest price drop of all the options.

Short-term impact on agricultural incomes (detailed results can be found in Annex 4)

Based on the usual model farm approach described under the previous options, agricultural income was simulated.

The results of this simulation exercise show that the consistent price decrease under the deregulation scenario would have a very significant impact on agricultural incomes, which would, after the first year, fall by between 11% for non-specialised table wine producers in Sicily and 39% for table wine specialists in Languedoc-Roussillon. After two years, agricultural incomes in those two regions would decline respectively by 21% and 74%.

Graph 4: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 4

(...PICT...)

Source: DG AGRI – FADN

5.1.3. Competitiveness

Competitiveness is a many-sided concept and difficult quantify and measure. Broadly speaking, the competitiveness of an industry can be defined in terms of the profitability of its production. In an undifferentiated-products industry, profitability is mainly linked to lower production costs compared to competitors, but, in differentiated products industries like the wine sector, another fundamental factor of profitability is the attractiveness of the product compared with the same industry in other countries, with which one might trade.

Thus, a wine industry is competitive if it has the capacity for profitable and viable production and can compete on the world scene by producing and marketing wines that meet consumers’ expectations and preferences.

Although a large part of the EU wine production can be certainly considered highly competitive in the global market, the increasing erosion of the market share of EU wines as against so-called new world wines, both on the domestic and on the export markets, shows a worrying loss of competitiveness of our industry, particularly in the low and medium quality segment.

The EU wine industry has several handicaps compared to its competitors:

– smaller production and processing structures, and lower yields, entailing higher production costs and lower volumes to respond to demand from large scale retailers;

– too large range of products and less clear price positioning and marketing strategies, making it difficult for consumers to understand, identify, remember and find again products they need or like;

– greater regulatory constraints in the CMO, like planting rights, the ban on new plantings, cumbersome procedures to allow the development of innovations in oenological practices or marketing strategies, and on the other hand, market support mechanisms preventing adjustment of production.

Option 1: Status quo, with possibly some limited adaptations

Although some instruments of the existing market organisation have played a positive role in boosting the competitiveness of the EU wine sector, for example the restructuring programme, which has allowed a quality improvement and an alignment of production with demand, the CMO has largely contributed to the loss of competitiveness of the EU wine sector; therefore a substantial extension of the existing regime would not lead to any improvement, but could only worsen the situation.

Option 2: Profound reform of the CMO

The measures proposed under this option would significantly contribute to an improvement of the competitiveness of the EU wine sector in different ways:

1. Ending market measures would encourage structural adjustment in the wine sector, leading less competitive holdings, whose production is currently largely intended for distillation, to abandon the activity. The overall competitiveness of the sector would thereby increase.

2. The reinforced grubbing-up programme and the incentives for early retirement of wine producers would facilitate structural adjustment of the wine sector and help to increase the average size of wine holdings in the EU, although the gap with the huge companies in new world countries could certainly not be closed.

3. Confirming the restructuring programme and strengthening rural development measures would permit continued modernisation of the vineyards, thus contributing to a greater cost-effectiveness and better market orientation of EU wine production.

4. More flexibility in the procedure for approving new wine-making practices would increase scope for innovative techniques. The possibility of authorising specific wine-making practices only for export would allow EU producers to operate on the world market in conditions of equal opportunities with non-EU competitors.

5. Simplifying the GI system and the labelling provisions would increase transparency for the consumer. Moreover, a greater flexibility in the regulatory framework would provide new marketing opportunities for EU wines: for example, permitting the indication of the wine variety and vintage year for table wine without GI would allow the expansion of the “vins de cépage” segment, which was one of the key factors for the recent overwhelming success of new world’s wines.

6. A more ambitious promotion and information policy could underpin new wine marketing strategies and innovations in wine-making practices.

As far as the proposed ban on the use of sucrose for enrichment is concerned, it was already mentioned that this provision could lead to an increase of production costs in wine regions currently making use of this practice. Replacing sucrose with unsubsidised concentrated must could increase the production costs of that part of German wine production relying on chaptalisation by 15–25%. This would have an adverse effect on the competitiveness of the producers concerned.

Option 3: Reform along CAP reform lines

The most significant positive impact, described under option 2, also apply to option 3. In particular, ending market measures would provide for better market orientation of wine production and the improvements introduced in the regulatory framework for wine-making practices, geographical indication system, and labelling rules would facilitate innovation.

However, concentrating the entire budgetary envelope on the SPS would mean wine producers could no longer benefit from the restructuring programme or any structural measure promoting a higher competitiveness.

Finally, we have to point out the adverse impact of the ban on sucrose for enrichment on competitiveness of Central and Northern European wine producers currently making use of this wine-making practice.

Option 4: Deregulation of the wine market

Besides ending market measures, common to options 2, 3 and 4, the main advantage provided by the deregulation scenario is the immediate abolition of the ban on new plantings.

The possibility of expanding the vine area without restrictions gives the most efficient producers freedom to optimise the size of their holdings and to operate at the most convenient production scale, although the rules regulating the access to GIs and protected denominations would de facto partly restrict the area eligible for protected designations.

Maintaining the status quo as regards allowing producers to enrich wine with sucrose would avoid the loss of competitiveness of Central and Northern European wine producers described in options 2 and 3.

Finally, as far as the so-called regulatory measures are concerned, incorporating the whole legal framework into horizontal legislation could produce improvements in competitiveness to the same extent as the more sector-specific approach in options 2 and 3. In any event, the practical impact would depend on the implementation of the general systems and on the way in which the particularities of the wine sector are taken into account, so as to promote the quality of the product and protect of the image of European wine inside the EU and in the world.

5.2. Economic and social impact on rural areas

Vine-growing and wine production play an important economic and social role in the level of activity and employment in rural areas of many Member States in the EU. As was mentioned in section 2.1, wine production represents, in the most important producing countries, about 10% of the value of their agricultural production.

In 2003, there were more than 1.5 million holdings with vineyards for wine production [19] in the EU-25 [20], representing more than 15% of all EU farms.

Wine farms as a whole absorb over 1.5 million Annual Work Units, which corresponds to about 15% of the total AWU employed in EU agriculture. Compared with other crops, vineyards are more labour-intensive, even though this higher labour-intensity is compensated by a smaller average farm size. The family labour force strongly prevails, but employment of regular non-family labour is considerable in some regions, particularly in France. Compared with other types of farms, wine holdings typically have a higher proportion of older farmers.

Vine-growing is vitally important in certain EU regions, where it represents an even greater share of regional agricultural output, use of the agricultural area and/or agricultural employment. There, the value of wine production accounts for 20% to 30% of final agricultural production, with a maximum of over 45% in Languedoc-Roussillon (France). At a more local level, the percentages are often even higher.

In those wine regions, alongside the permanent jobs in the vineyard, there is seasonal employment in the harvest and jobs linked to wine-making. Wine is either made directly on the holding, in a cooperative’s cellars or by a private enterprise, but always near to the production area, for reasons both technical and legal. Wine production is an activity where processing takes place on the spot, so the added value remains in the production region. That value can also be increased to the benefit of the producers if they sell directly from the holding.

Finally, the economic and social function of wine production extends well beyond the production and marketing of wine and should therefore be measured taking into account indirect economic activity in the production regions: its knock-on effect in terms of employment, for example linked to wine distilleries, or tourism, contributes to the rural development of the regions it is present in. In addition, grape and wine production fulfils non-commercial functions – its structuring effects having an impact on the countryside, villages and rural communities.

Broadly speaking, the impact assessment on agricultural incomes (see section 5.1.2) already provides useful indications about the possible economic and social impact of the four reform options on rural areas of regions, in which vine-growing plays a major role in their agricultural activity.

Option 1: Status quo, with possibly some limited adjustments

The continuation of the existing wine regime, even with limited adjustments, has been proved to be unsustainable in the long term. The progressive deterioration of the market situation in the wine sector would increasingly lead to economic and social difficulties in rural areas of the most concerned regions.

Option 2: Profound reform of the CMO

In general, the smooth stabilisation of the market balance, and hence the achievement of economic sustainability of wine production, would have a favourable impact, not only on the wine sector itself, but on the agricultural and economic activity of rural areas as a whole. In particular, the funds allocated to the national envelope would facilitate structural adjustment of the sector and mitigate the adverse economic and social effects of downscaling wine production.

In addition, the grubbing-up premium and reinforced early retirement measures under rural development would give adequate support for non-competitive or older vine-growers, thus providing them an opportunity to leave the activity. On the other hand, coupling the grubbing-up of vineyards with granting SPS entitlements could ensure viable alternatives for farmers intending to reconvert production.

Other rural development measures could address additional specific problems linked to restructuring.

Option 3: Reform along CAP reform lines

The complete lack of specific structural measures accompanying the abolition of market tools and helping the structural adjustment of the wine sector would entail significant risks for the cohesion of wine producing regions. This could particularly affect the fragile rural economies of the new and the acceding Member States.

While wine producers would be partly compensated for the price drop and loss of income through a decoupled payment, some of the jobs directly and indirectly linked to the wine production could be lost.

Option 4: Deregulation of the wine market

Immediate deregulation of the wine sector would have the most radical impact on the economy of wine-producing regions. Besides the significant fall in income for wine producers (see section 5.1.2) and the adverse effects linked to the absence of structural measures accompanying the adjustment process in the wine sector (as for option 3), abolishing the ban on new plantings could lead to a substantial shift of production between wine-producing regions or even between Member States, thus resulting in an additional risk for the economy of less competitive and hence more fragile wine-producing entities.

Again, the new and the acceding Member States will particularly suffer from the complete lack of necessary support, preventing them from taking the opportunity to apply the necessary structural measures they need (grubbing-up and/or restructuring) to adjust their wine production, in quality and quantity, to demand. Given the importance of the agricultural dimension, and in particular of the wine sector, in Romania and Bulgaria, it is very likely that this would impact on their rural economies as a whole.

5.3. Impact on the environment

Vine-growing has both positive and negative effects on the environment.

The most important environmental pressures exerted by wine production are:

– impact on the soil: erosion (if vine rows are arranged in the direction of the slope and soil is uncovered between the rows), compaction, loss of organic matter and contamination through plant protection products;

– intense use of plant protection products, in particular fungicides, which have an adverse impact on water, soil and biodiversity;

– disposal of waste and by-products of vine-growing (e.g. pesticide packaging) and wine-making (marcs and lees).

Other environmental concerns raised by wine production, although to a lesser extent and limited to certain regions, are an increasing use of irrigation, the effects of excessive specialisation and risks resulting from disordered grubbing-up of vineyards.

A major wine regime measure with considerable environmental consequences is distillation of the by-products of wine-making. On the one hand, it allows a sound management of these by-products, thereby avoiding environmental risks (acidification of the soil, infiltration of alcohol in underground waters, air pollution by ethanol and ozone production, etc.); on the other hand the practice of not returning the elements contained in these by-products to the soil and of using mineral rather than organic fertilisers contributes to a progressive loss of soil organic matter. Moreover, the environmental costs of distillation operations (energy use, transport of by-products to distilleries, etc) are not negligible.

Despite all the environmental implications of vine-growing, the wine CMO contains few explicit references to environmental concerns. More specifically, the extent to which the environment is integrated in the wine regime is very limited compared to other market organisations that have undergone the 2003 CAP reform.

In particular, as vine land is not eligible for direct payments, it is not covered by cross-compliance rules. This means that there is currently no environmental baseline for vine-growers, except that provided by environmental directives. In reality, some wine producers and part of the corresponding vine area are nevertheless already covered by the system of cross-compliance, since any wine producer receiving direct payments (for areas other than vineyards) is subject to cross-compliance for his whole farm. According to FADN data, 74% of professional wine producers in the EU and 57% of the corresponding total vine area are subject to cross-compliance obligations, but with considerable variation at Member State level, the largest coverage being in Greece and the lowest in France and Germany.

The reform of the CMO should better integrate environmental concerns in the wine regime. This could be achieved along two lines:

1. establishing an environmental baseline of what it is reasonable to expect a farmer to fulfil without additional support. This baseline would include statutory management requirements under Annexe III and all standards in Annex IV of Regulation 1782/03 on cross-compliance, whose scope should be adapted and extended to cover specific problems concerning vine-growing;

2. support for environmentally-friendly production methods, which go beyond the environmental baseline, like organic production, Integrated Pest Management (IPM) and, if possible, Integrated Crop Management (ICM).

Option 1: Status quo, with possibly some limited adjustments

The status quo would result in the continuation of a number of pressures on the environment, putting the wine regime significantly behind almost all other CMOs in terms of environmental integration. The wine sector jeopardise its own image for producing a wholesome and desirable product.

Option 2: Profound reform of the CMO

As under this option many wine farms would not receive direct payments, which could be cut in the event of non-respect of cross-compliance rules, there is no easy way to enforce the environmental baseline in the whole vine area.

However, the proposed option offers enough flexibility to adopt alternative measures. A realistic solution to tackle the problem could be the following:

– make support provided by each single measure granted under the wine CMO, including all measures eligible for the national envelope and under the second pillar, conditional on cross-compliance;

– where the first method is not applicable, leave Member States to apply their usual statutory penalties for non-compliance with Community legislation.

Financial incentives for environmentally-friendly production would be provided as agro-environmental measures, reinforced through the new funds transferred to the second pillar as an additional envelope earmarked for wine-producing regions.

Other new elements introduced by option 2 could be assessed as follows:

– Strengthening permanent abandonment would have a globally positive impact on the environment, since it generally reduces monoculture and the associated environmental pressure. However, it could also lead to environmental risks if the land is abandoned (risks of soil erosion) or replaced by more intensive production. In any event, the grubbed-up area could be given an SPS entitlement, thus falling immediately under the scope of cross-compliance. The proposed cultural landscape payment under the rural development programme could also help to prevent the adverse impact of a far-reaching grubbing-up programme for vines in areas with a specific and recognised environmental/landscape value, which could otherwise be endangered.

Regarding the use of vine land after grubbing-up, historical records show that the situation is quite different from one MS to another [21]: in Portugal, vines were mainly replaced by maize and then sugar beet; in France by arable land and fallow land; in Spain by cereals, olive trees (particularly in Castilla-La Mancha), vines to produce table grape and orchard; in Germany, by fallow land and in some cases by forest land; in Italy, in the Po Valley by arable land, in the hilly regions of Trentino and Romagna by orchards and in Southern Italy by olive trees; in Greece, finally, by olive trees.

It some cases, e.g. in Castilla-La Mancha in Spain, grubbed-up vineyards were abandoned, either immediately after grubbing-up or later, since, due to the arid conditions; the cereals that were often cultivated after the vines were not as profitable as expected. In general, vineyards were also rarely replaced by forest;

– the removal of all distillation measures may have a positive impact on the environment, assuming residues/wastes from wine-making are dealt with in a proper manner.

In Member States currently withdrawing by-products under supervision, no environmental concerns have been raised. Consequently, the propos