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James Flanigan

European Vintners Living in the Past

June 05, 2005|James Flanigan

If you want to understand what a fix Europe's economy is in -- and why the proposed European Constitution seems to be going down in flames -- look no further than the continent's famed vineyards and wineries.

Last month about 10,000 vintners in France ran amok following a demonstration, setting fire to train cars, pelting them with rocks and blocking rail traffic, causing an estimated $2.5 million in damages to the national railway.

Their beef? They're not getting paid enough for their product, and they blame the government for not doing enough to help.

Angry demonstrations by farmers are a long-standing tradition in France, of course, but the straits that Europe's winemakers are in -- and their response to it -- exposes the serious deterioration of a once-proud, signature industry.

The problem in a nutshell is that wine drinking is declining in Europe and cheaper foreign-made wine is stealing market share, but winemakers in France and Spain in particular are producing too much, creating a glut.

Wouldn't this be a chance to cut prices, move excess product off the shelves and win back some market share? Mais non.

The European solution is to take perfectly decent wine, even some pretty good stuff, and essentially destroy it. It seems a waste, but that's the way things work. Surplus wine is turned over to a Brussels-based European Commission program that distills it into industrial alcohol as a way to keep wine prices high.

In Europe, wine prices are regulated and vintners are subsidized by the Common Agricultural Policy, a founding principle of the Common Market that was formed in 1957. The aim of the policy was to allow small farmers, including vintners, to stay in business. The practice of destroying surplus wine rather than putting it on the market at discount prices has been followed for years, explains Christian Berger, agricultural attache at France's embassy in Washington.

But apparently it is not enough to make winemakers happy this year: They are complaining that Brussels is paying them too little for destroying it. Thus the near-riot in late May.

Instead of subsidies, waste and demonstrations, Europe's wine industry could use somebody like Fred Franzia.

Franzia's Bronco Wine Co. of Ceres, Calif., stepped into the California wine grape surplus of three years ago, and the now-famous "Two-Buck Chuck" was born. Franzia bought some of his neighbors' wine at low prices, combined it with his own production, and launched the Charles Shaw label at $1.99 a bottle through the Trader Joe's chain of specialty food markets.

There appears to be no thought in Europe of bottling the surplus wine -- rather than destroying it -- and exporting it at a discount price to the U.S. and other non-EU markets.

"I don't think that could be done economically, what with costs of transportation," says Berger.

But Australia, South Africa and Chile, with greater distances to ship, are sending wines to the U.S. market and doing a fine business at $6 to $10 a bottle. Surely a wine from France could be successful with a good marketing campaign. A Five-Buck Jacques wouldn't have to compete directly with Two-Buck Chuck, but it might be very appealing to American wine drinkers.

The EU, however, won't allow a Five-Buck Jacques, and so far no entrepreneurial-minded vintner appears to have broken ranks and discounted wine for fast sale.

All of which illustrates the contrast between the U.S. preference for market solutions to commodity surpluses and Europe's preference for solving problems through government regulations.

And that brings us to why citizens of France last Sunday and the Netherlands on Wednesday soundly rejected the proposed EU constitution. The new law for all 25 EU member states would have given more power to a central governing body in Brussels and pushed economic restructuring in all countries.

But many of Europe's people are afraid of such changes. Most of the Continent's economies are stalled and changes in labor laws, which brought some flexibility to employers on matters of hiring and firing and costs of labor, have failed to produce benefits.

The economies of France, Germany, the Netherlands and Italy, the big four of the original six founders of the Common Market, are growing at less than 1% this year, if they are growing at all, with unemployment rates as high as 12%. Once vigorous Europe is not adapting to the changed circumstances of the global economy.

Now in the wake of the voters' verdicts, new economic policies won't be tried for some time, says economist Adam Posen, an expert on the EU at Washington's Institute for International Economics. Changes are needed, Posen says, "to end restrictions on retail hours and protections for special interests [winemakers, for example] and to ease the multitude of regulations that discourage new business."

Another of Europe's big problems is high taxes. For most EU countries, the government's tax take amounts to 45% to 50% of the national gross domestic product, compared with 32% for the U.S. Europe is unlikely to become economically lively without tax cuts, but that is unlikely to happen because it would mean cutting government programs in the face of fierce public resistance.

Given the mood in Europe toward change, it's easy to see how we came to the unexpected day when Australian and American wines are selling around the world and Europe's vintages are being turned into rubbing alcohol.

James Flanigan can be reached at jim.flanigan@latimes.com.

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