House of Lords - European Union

Select Committee on European Union Thirtieth Report

CHAPTER 2: THE PROPOSALS FOR REFORM

22. The Commission's proposals[11] for reform were published on 4 July 2007. Box 2 summarises the main proposals. The Commission believes that a separate Wine CMO should be retained but that the existing regime "must, without doubt, be fundamentally reformed"[12].

BOX 2
The Commission's Proposals

(i) Subsidies for all forms of distillation should cease.
(ii) Vine growing areas and land grubbed up from vine growing should be brought within the ambit of the Single Farm Payment.
(iii) Funds should be transferred from the Wine CMO Budget to support Rural Development in wine-producing regions.
(iv) There should be a voluntary and subsidised grubbing-up programme.
(v) The current ban on new plantings should be extended until 2013.
(vi) The system of wine classification should be brought into line with that in use within the Community for the classification of other agricultural products.
(vii) Wine labelling rules should be relaxed to enable more information to be provided to consumers.
(viii) Wine-making practices endorsed by the OIV should be regarded as the benchmark for those to be used by EU wine producers.
(ix) Subsidies for the use of concentrated grape must for the purpose of wine enrichment should cease and the use of sucrose for enrichment should be prohibited.
(x) "National Envelopes" should be allocated to wine-producing Member States from the Wine CMO Budget to enable them to fund a range of approved support measures within their national boundaries.

Distillation

23. The Commission has proposed the abolition of EU subsidies for all categories of EU wine distillation and for the associated storage costs. It is clear from the evidence we have received that distillation subsidies have encouraged the over-supply which the Community has seen in recent years. A number of our witnesses were clear that over-production was to some extent deliberate. According to Eva Corral, Head of the Wine Sector Division at COPA-COGECA[13], the possibility had to be faced that some farmers were using crisis distillation subsidies in order to generate additional revenues (Q 218). Luigi Polizzi, the Italian SCA[14] representative, told us that in Italy "we have some regions that produce just for distillation" (QQ 382, 384), while his German counterpart took the view that "the wine which is distilled is produced for distillation, not for wine consumption, and we are therefore spending money to get rid of surpluses when we think it is better to spend the money for development in that region" (Q 422). We concur with this view.

24. It may be argued, however, that distillation has other purposes—to supply the potable alcohol industry and to maintain the quality of wine by preventing over-pressing of grapes. It is not clear to us why, if there is a market for potable alcohol, the Community should be subsidising it by enabling the industry concerned to obtain one of its raw materials more cheaply than would otherwise be the case. Lene Naesager, a Member of the Agriculture Commissioner's Cabinet with responsibility for wine reform, said: "For our producers of port and sherry it is important to have access to potable alcohol. They have an implicit subsidy, because the potable alcohol that they buy from the distilleries is a bit cheaper than what they would see without the subsidy" (Q 290). Asked what would be the effect of a removal of the EU subsidy, Ms Naesager told us that according to the Commission's calculations it might add ten cents to the price of a bottle of port (Q 291). Lars Hoelgaard, Deputy Director-General for Agriculture at the Commission, felt that the subsidy could be resulting in some distilling operations being kept alive artificially. "If we do away with this systematic type of distillation," he told us, "there will only be those who are able on the one hand to process it efficiently and on the other can obtain a market" (Q 285). He added: "There is a limitless market. As long as the Commission and the Community taxpayer are willing to finance and subsidise it, there is no limit. But we cannot continue to go down that road" (Q 286). We agree that there is no need to subsidise a product for which a commercial market exists.

25. The case for distillation to maintain wine quality depends to a large extent on whether there is considered to be a case for defining wine quality without reference to the disciplines of the market, which is essentially what the CMO in its present form is attempting to do. The logic of the market is that, if consumers regard wine as being of inadequate quality, they will not buy it; and, if there are no market-distorting measures (such as subsidies) in place, producers will cease to produce it and either produce better-quality wine or cease production altogether. Underlying the 1999 Regulation, however, is a notion that quality in wine is something which exists apart from the market and needs to be regulated by administrative rather than market means. As witnesses from the UK Wine and Spirits Trade Association put it, "there is a danger often in wine that we think it is different from you or I going to buy a stereo or a piece of furniture" (Q 123). We return to the subject of wine quality in our comments on the Commission's proposals on wine classification. Suffice it to say here that we are not persuaded of the validity of the case for retaining an expensive subsidy designed to preserve a notional concept of wine quality which is increasingly at variance with the realities of the market.

26. We strongly support the Commission's proposal to end all subsidies for distillation and for its associated storage.

Single Farm Payment

27. The Single Farm Payment (SFP) was a key element of the 2003 CAP reform. Whereas previously farmers had received funds from the CAP Budget to compensate them for shortfalls in the prices of different commodities being grown, the SFP is a single payment based on the size of land holdings which leaves farmers free to produce according to the demands of the market. One of the conditions for receipt of the SFP is that of cross compliance, meaning that farmers in receipt of the payment must comply with a number of broader requirements, including the maintenance of minimum environmental standards. As the Wine CMO did not form part of the 2003 reform package, wine producers have not been eligible for the SFP. The Commission has proposed that all vine-growing areas should in future qualify for the SFP and that land taken out of wine production under the proposed grubbing-up scheme (see Paragraphs 32 to 38 below) should come automatically within its ambit. A minimum environmental requirement is to be attached to the grubbing-up premium to avoid land degradation.

28. The aim of this measure is partly to bring about decoupling of wine-growing from CAP support and partly to promote conservation of the environment. These are fair objectives. Bringing vine-growing within the scope of the SFP should encourage wine producers who cannot find a market for their product to consider switching to other crops for which a readier outlet exists. The rules of cross compliance should also help to protect the landscape and environment in wine-growing regions, especially where land is taken out of wine production under the grubbing-up scheme.

29. We support the inclusion of vine-growing areas and of land withdrawn from vine-growing within the ambit of the Single Farm Payment and its rules concerning cross compliance.

Rural Development

30. It is proposed that there should be a substantial transfer of funds from the Wine CMO to support a range of Rural Development schemes. These include investments in technical facilities and marketing, vocational training, support to cover the additional costs of agri-environment measures and early retirement grants to farmers who opt to cease wine-production in order to transfer their farms to others. The funds transferred would be substantial (around one third of the Wine CMO Budget) and would be ring-fenced to ensure that they were spent only in wine-producing regions. Moreover, as the schemes concerned would form part of national Rural Development programmes, they would be co-financed by the Member States concerned. This should exert some discipline over the amounts and duration of the spending involved. With one exception, we support the proposed transfer of funds for Rural Development. The exception concerns the use of transferred funds "to provide investment support to wine producers who have to change from the use of sugar for enrichment to the use of must"[15]. For reasons which we give later under the heading of Enrichment (see Paragraphs 54 to 58 below), we do not support this specific proposal.

31. We support the transfer of funding from the Wine CMO Budget to provide for a range of Rural Development schemes on the basis of co-financing by Member States, but we do not support the employment of Rural Development funds to compensate for changes in the rules governing wine enrichment.

Grubbing-Up

32. The Commission is proposing that there should be a substantial programme of aid to encourage the grubbing-up of vineyards producing wine for which there is poor market demand. The decision to grub up will be left to the individual wine grower, though there will be some constraints to avoid regional economic imbalances or detriment to the environment. For example, Member States will be permitted to halt the process within their national boundaries if grubbing-up should exceed 10 per cent of their area under vine; and vineyards in mountainous regions and on steep hillsides, where grubbing-up could lead to adverse environmental consequences, will be exempted.

33. Those who opt to grub up some or all of their vineyards will receive two sets of benefits, comprising a grubbing-up premium for each hectare grubbed up and, if they are intending to cease production altogether, a retirement grant designed to ease the transition from wine growing to other forms of activity. Those who grub up just part of their vineyards but are planning to remain in wine-growing will receive the Single Farm Payment. Grubbing-up premiums are to be funded from the Wine CMO Budget under Pillar 1 of the CAP, while the intention is that retirement grants should be funded under Pillar 2 (under the heading of Rural Development) from funds transferred from Pillar 1. A five-year programme is envisaged, and grubbing-up premiums will be heavily front-loaded in order to encourage early take-up. The Commission believes that these measures should result in some 200,000 hectares of vineyards being taken out of production.

34. We found that the Commission's original (2006) grubbing-up proposal, which was rather more ambitious than the present one, generated strong feelings among many of our witnesses. A prime concern, particularly among those wine-producing Member States whose representatives gave evidence to us, was that grubbing-up should not become a free-for-all measure and that the Member States themselves should have some control over the process. Luigi Polizzi, for Italy, stressed that "it is important to give Member States the instruments to manage this measure" to ensure that national economic and environmental concerns were respected (QQ 382, 384). Similarly, Zoltan Somogyi, for Hungary, suggested that "some control should be given to the Member States in order to have an influence on the uptake of grubbing-up" (Q 360). He feared lest wine growers in his country, even if not faced with surplus production, might be tempted to grub up simply as a means of making easy money (Q 349). Betrand Guillou, for France, was concerned about the emergence of imbalances between the wine industries of Member States or of regions within States (QQ 483, 487, 489).

35. Dietrich Guth, for Germany, took a rather different view. He felt that grubbing-up was "a very expensive instrument" and that it would be more cost-effective to spend the money on restructuring of the European wine industry (Q 423). He also called into question the need for a grubbing-up programme if distillation were to be abolished (QQ 425, 426). And he felt that Member State control of grubbing-up could actually make the problem of over-production worse rather than better because the States themselves might well select as candidates for grubbing-up premiums those regions where the yield per hectare was low.

36. The Commission itself was clearly aware of these tensions. Lars Hoelgaard told us that the wine-producing Member States did not want to see grubbing-up at the discretion of individual wine growers because "they know that there are so many of their farmers, the wine producers, who are just sitting and waiting for this possibility to get out … It is really not the farmers that they have in mind. It is the dependency on that activity in the rural areas—the processors, the distillers, the employment" (Q 306). This is, no doubt, a reason why the Commission has modified its original proposal both to achieve a lower overall take-up and to give Member States an element of control of the process (see Paragraph 32).

37. Our own views of this proposal are somewhat mixed. We recognise the force of Dr Guth's observation that grubbing-up is expensive and that, if subsidised distillation is abolished, capacity will adjust automatically to the market. On the other hand, we are conscious that there is heavy dependence in some regions of the Community on wine production and we therefore feel that some assistance is appropriate in order to allow those who decide to reduce or cease production to have what the Commission described to us as a "soft landing" (Q 306). While we also note the concerns of wine-producing Member States lest a grubbing-up programme should get out of control and result in unintended adverse economic or environmental consequences, we believe that these concerns should not be over-stated and that the Member State controls which the Commission has incorporated in its latest proposals should prove adequate. We believe that economic and environmental concerns are best addressed through Rural Development policies rather than by standing in the way of much-needed adjustments in production capacity. Our main concern with regard to the Commission's proposal is lest the exemptions envisaged should prove over-elastic in the hands of Member States and the measure frustrated as a result. We consider therefore that the exemptions should be tightly drawn.

38. We support the Commission's proposed grubbing-up programme but we consider that there is a need for tight definition of the exemptions from it which Member States may invoke.

The Planting Ban

39. The Commission is proposing that the current ban on new plantings of vines for commercial production should be extended from 2010 to 2013. The argument here is that, if there is going to be a five-year subsidised grubbing-up programme, there has to be restriction on new plantings over the same period to ensure that the objectives of the programme are not frustrated. Many wine-producing Member States not only support extension of the ban but would like to see it extended for longer. Luigi Polizzi, for Italy, told us: "We would like … to maintain the ban for ten years … It is important to give the producers who remain in activity the opportunity to safeguard their investment" (Q 392). Bertrand Guillou, for France, argued that "it is necessary to decrease production but, if in five years it is possible to plant as we want, then it is paradoxical to pay for grubbing-up now" (Q 489).

40. The Commission itself seems to be somewhat ambivalent in its views on the subject. In its 2006 Working Paper it recognises that planting bans can distort competition with non-EU wine producers, who are not subject to such restrictions, and that with advances in wine-growing technology leading to increased yields per hectare planting bans have become an obsolete means of reducing the volume of wine production[16]. Jose Ramon Fernandez, Secretary-General of Comite Europeen des Entreprises Vins[17], endorsed these arguments (Q 177). In written evidence to us, New Zealand Winegrowers observed that "controls on production potential, no matter how sweeping, are never likely to achieve long-term equilibrium between supply and demand while producers continue to receive incentives to produce wine for which no market exists. Conversely, if market interventions were removed, then equally controls on production potential could be removed"[18].

41. In our view, extension of the current planting ban would mask the symptoms rather than tackle the causes of the current malaise within the wine sector. While short-term crisis management measures, such as grubbing-up payments, might perhaps be justified in order to ease the departure of some producers from the industry, a lasting solution to the problem must be to improve the industry's competitiveness. An extension of the ban on new plantings, however, would run counter to this. Witnesses from Defra described the planting ban as "a double-edged sword" (Q 24) and pointed out that it "has a perverse effect of stopping good producers—as well as the bad ones—expanding their operations" (Q 23).

42. We do not support the proposal to extend the ban on new plantings beyond 2010. We consider that, with the removal of subsidised distillation, production capacity will adjust itself to demand as the result of market forces, especially if the subsidised grubbing-up programme proposed by the Commission goes ahead.

Wine Quality Classification

43. The Commission is proposing that the regime for wine classification should be aligned with existing Community rules governing other agricultural and food products. Under Council Regulation 510/2006, a named food or drink, if registered at EU level, can be awarded a "Protected Designation of Origin" or a "Protected Geographical Indication" and safeguarded against imitation. Producers can seek to take advantage of the resulting market profile on the basis of quality attributes which have been tested and registered. It is therefore proposed that the current classification of wines with a Geographical Indication (GI) should follow a similar pattern, with such wines being grouped under two new headings—Wines with a Protected Geographical Indication (PGI) and Wines with a Protected Designation of Origin (PDO). A registration system will be introduced, at Member State and Commission level, under which the necessary technical data will have to be submitted for examination. In addition, the distinction will be removed between the rules governing the labelling of wine with a GI and those applying to other wines. So, for example, it will be possible for non-GI wine producers to show the vintage year and grape variety on the label.

44. The proposal to align the classification of wines with that of other foodstuffs is to be welcomed. In recent years there has been a proliferation of wines with GI status and the proposed registration system should help to bring authenticity to the process. Even more welcome is the proposed ending of labelling restrictions for non-GI wines. Jose Ramon Fernandez, from Comite Vins, was critical of the existing labelling regime. "The rules in the European Union for labelling," he told us, "are that the only wines that are able to provide interesting information to the consumer are the wines in the Geographical Indication scheme … With table wine you have to put 'table wine', which is a pejorative message, and the only thing you have there is the brand and whether it is red or white … so you are not really stimulating the possibility of valuing this segment of products. That is why we say that in the new rules there should be more flexibility for all wines to provide accurate, objective and verifiable information to consumers" (Q 188). We fully endorse Mr Fernandez's comments. Indeed, we would go further and argue that wine producers should be free to decide what to put on their labels provided that what they say is accurate and truthful.

45. However, while we see the changes which are proposed as a useful step in the right direction, we are not convinced that they will deal adequately with the underlying problem of the existing classification system—namely, the concept that wine quality is linked to geographical factors. The Commission's proposals state that "the concept of EU quality wines is based on a geographical origin approach … The EU wants to confirm, adapt, promote and enhance this concept worldwide"[19]. Perpetuation of the linkage between quality and geography fails to recognise that the mass consumer nowadays is more interested, when purchasing wine, in such factors as the grape variety and the taste of the product than in the precise location where the grapes were grown. Philip Gregan, Chief Executive Officer of New Zealand Winegrowers, made the point forcefully:

"If you look at most consumers, it does not matter whether they are in France or in Italy or in Spain or Korea—they do not care one inch about whether [wine] was produced on the north side of the hill or the southern side of the hill. At the very top end of the market—the top three or five per cent—yes, they are vitally interested in that, but the rest of the market is not. Europe has deluded itself into thinking that the rest of the market is interested in all that flawed theology. The whole regulatory system is based on the fact that it is interested in it and it has perpetuated the production of wines on that basis. The problem is that the market does not see it that way" (Q 707).

46. We do not wish to be misunderstood. We are not suggesting that EU wines should not be produced and marketed on the basis of their place of origin or that there should be a free-for-all in which wine producers are permitted to put whatever they wish on their labels. If wines can be sold on the basis of their geographical origins, fair and good. And those who produce wines for sale on this basis must, like the producers of other foodstuffs based on areas of origin, such as Parma Ham, be given adequate regulatory protection against their brands being abused by imposters. But it seems to us that the changes which are proposed in this area, welcome as they are, will do little to put EU wines onto a level marketing playing field with those from the New World. We believe it is unlikely that the mass consumer—as distinct from the connoisseur—will be able to derive any meaningful benefit from the new system.

47. We welcome the proposed relaxations in the current regulations on wine labelling. While we also regard the proposed new rules governing the registration of wines with a geographical indication as a step in the right direction, we do not believe that the proposed changes will be effective in raising the market profile of EU wines vis-à-vis their New World counterparts.

Wine-Making Practices

48. The Commission is proposing that those wine-making practices (WMP) approved by the Organisation Internationale du Vin (OIV) should become the benchmark for oenological practices approved within the Community; that the filtering of approved practices into the Wine CMO should, subject to some exceptions, become the responsibility of the Commission rather than the Council; and that oenological practices which have been agreed internationally should be authorised for wines produced for export to countries outside the Community.

49. The case for this change was made to us by the Commission in evidence. Lars Hoelgaard put it this way:

"We should give our wine producers the same opportunities in terms of methods, modern techniques, etc, that they have in the third countries. If a producer organisation, a protected denomination of the Geographical Indication, says 'I do not want to use those methods because it will infringe on the reputation of my wine', fine, then let him do so. But at least that opportunity should be available for other wine growers to make use of" (Q 309).

50. Some witnesses drew our attention to the need to preserve the natural character of wine. Jose Ramon Fernandez, for example, said that "of course we have to be open to technical and commercial innovation. We should not prevent ourselves from accepting oenological practices. That goes with the philosophy of ameliorating the natural qualities of the product. But we do not want to be in the position of explaining to consumers that they are drinking something which has lost completely its natural aspect" (Q 194). This issue—that the "natural" characteristics of wine must be preserved from contamination—is one of the underlying questions to which we will return in our main report. Suffice it to say here that most of those who gave evidence to us were supportive of treating the OIV as the benchmark for EU oenological practices.

51. New Zealand Winegrowers voiced some reservations to us about the OIV. According to Philip Gregan, "the OIV is an organisation that is struggling with the internationalisation of the wine industry. It was a European body and it is struggling to come to terms with its role, not as a European body, but as an international body". He added that "it has a very important role to play, but that is as long as it operates as an international body and not as a functionary of the European Union". Enlarging on this, he suggested that the delegates to the OIV tended to be those "who have a vested interest in maintaining those wine-making practices which are permitted in their individual regions" (Q 729).

52. Mr Gregan also drew our attention to another body—the World-Wide Trading Group (WWTG)—which was formed in 1998 and which operates on the basis of a Mutual Acceptance Agreement on Oenological Practices. What this means in effect is that each signatory accepts that the others have in place adequate systems for ensuring that its wine industry produces wine which is safe to drink and is labelled accurately. Mr Gregan expressed the wish that the EU might sign an agreement with the WWTG and operate on the basis of reciprocity rather than prescription. "What we want," he told us, "is a vibrant, vital, exciting wine market through competition. If you believe in your product, you can carve out your niche and succeed in that. If you do not, then go and ask a regulator for help, but we believe in our product" (Q 712). We commend the WWTG to the Commission's consideration.

53. We support the Commission's proposal that the OIV list of recommended WMP should be adopted as the benchmark for EU oenological practices and that the filtering of individual WMP into EU regulations should be the responsibility of the Commission. We suggest also that consideration should be given to the establishment of reciprocal arrangements between the EU and the WWTG.

Enrichment

54. The current position on enrichment is summarised in Paragraph 19 above. The Commission is proposing to withdraw EU subsidies for the use of concentrated grape must to enrich wine and, at the same time, to ban the use of sucrose in wine-making. The effect will be to increase the cost of producing wine both for those Member States—in the Mediterranean region—who already use grape must and who will no longer receive the subsidy and for others—in Central and Northern Europe—who will have to use the more expensive grape must instead of cheaper sucrose.

55. This proposal was defended to us by Lars Hoelgaard in terms of removing a distortion of the internal market: if some producers had to pay more for must, that would hand an unfair competitive advantage to those who use sucrose (Q 330). We also encountered the suggestion that the use of sucrose was, perhaps, not a proper oenological practice on the grounds that wine is defined in the regulations as "a product obtained exclusively from the total or partial alcoholic fermentation of fresh grapes" (Q 331). This view was, however, disputed by others, who also pointed out that sucrose was added to wine by non-EU wine producers, so a ban on its use would create a distortion of competition between the EU and the New World (Q 374). It was also suggested to us that one motivation for the proposed ban on sucrose and greater use of concentrated grape must was a desire to use this measure to help mop up wine surpluses in must-producing States (QQ 436, 613).

56. Most of our witnesses took the view that there was nothing unnatural about the addition of sucrose to wine. Robert Beardsmore, General Secretary of the UK Vineyards Association (UKVA), countered the suggestion that the addition of sucrose was not an OIV-authorised oenological practice. He told us that, in response to a query from the UKVA, the OIV had stated that the addition of sucrose is neither authorised nor banned by the organisation and that the OIV took no view on the issue of sucrose versus grape must (Q 610).

57. Dietrich Guth, for Germany, suggested to us that the ban "was a gift to the Italians and to the Spanish and the French to reduce their over-capacity in the vineyards in order to produce expensive sugar for use in wine production" (Q 436). Be that as it may, we do not subscribe to the Commission's logic about the need for this measure in order to remove an internal trade distortion. We can see no valid reason why those producers who currently use grape must to enrich their wine cannot switch to using sucrose if the subsidy for grape must is withdrawn. The result would be a levelling-down rather than a levelling-up of production costs within the Community and at the same time the creation of a level economic playing field with wine producers outside the EU. If, on the other hand, the Commission's proposal is accepted, it would have adverse consequences for wine producers in a number of Member States, including Germany, Hungary, the UK and even parts of France. Using concentrated grape must to enrich wine, we were told by the UKVA, costs more than five times the cost of using sucrose. As we have noted above (see Paragraph 30), it is proposed that Rural Development funds might be used to provide "investment support" to farmers faced with higher production costs as a result of this measure. We see no case for spending money in order to correct the effects of a misguided proposal which will create unnecessary costs for many wine producers.

58. We do not support the Commission's proposals on enrichment. We agree that the existing subsidies for concentrated grape must should be removed but we consider that a requirement on producers to use grape must rather than sucrose will unnecessarily increase production costs and at the same time create a distortion in the market vis-à-vis non-EU producers.

National Envelopes

59. The Commission is proposing a decentralisation of some two thirds of the Wine CMO budget. Each wine-producing Member State will be allocated an "envelope" of money with which to fund, within its boundaries, the various measures provided for in the reforms of the wine sector. Envelopes will be allocated to Member States on the basis of a formula deriving from a combination of each State's area of land under vine cultivation, the volume of wine produced and historical expenditure from the Wine CMO budget. Once allocated, envelopes may be used at the discretion of Member States for a range of approved policy instruments, including crisis management, "green harvest", the restructuring of wine industries and the promotion of wine sales. In the following paragraphs we address the concept of national envelopes and the four uses to which they may be put.

THE NATIONAL ENVELOPE CONCEPT

60. We do not have difficulty with the concept of national envelopes. As Eva Corral, from COPA-COGECA, pointed out to us, "the wine sector is very different from one Member State to another, from one region to another—the type of product, the type of organisation of the sector in each region or in each country, the size of the sector" (Q 214). It could well be that individual Member States are best-placed to know where resources are most needed to improve the competitiveness of their wine industries. Our concern is with the practical implementation of the concept. In particular, we do not want to see either the amount of money from the Wine CMO which is divided up into national envelopes or the formula for its allocation among wine-producing Member States become permanent fixtures; and we wish to see clearly-defined rules to govern how the money allocated to Member States in national envelopes may be spent.

61. It is important that the overall sum for allocation to Member States should be fixed in an objective manner, reflecting the needs of the reform process rather than being simply a continuation of current Wine CMO funding. The Commission's proposals state that "the impact of the proposed reform does not increase costs with respect to the current level of €1.3 billion devoted to the sector … It is expected that the changes and innovations in the regime will lead to the budget being used more efficiently"[20]. While we agree that the majority of the proposals put forward will make better use of taxpayers' money, we are concerned lest the objective of controlling Wine CMO costs overall is being overlooked. In our view, the Community should be looking to see a reduction in the medium term in EU taxpayer support for the wine sector.

62. Lene Naesager foresaw that the allocation of national envelopes would be a contentious issue when she gave evidence to us—that those Member States whose producers have been in receipt of large distillation subsidies will be looking to receive large envelopes, while others whose wine growers have received little or no subsidy will get nothing (Q 341). The result of such an allocation system could be to institutionalise the status quo. We recognise, of course, that the lion's share of available EU wine sector funding must go to those Member States with problems to resolve within their wine industries and that these tend to be the large producers of EU wine. The formula proposed by the Commission would appear to be designed with this objective in mind. Be that as it may, it will be necessary to find an allocation formula which does not result in a fixed annual subsidy to Member States with underperforming wine industries and to put in place arrangements to ensure that allocations are delivering the efficiency gains which they are designed to produce and that ongoing levels of support are modulated to reflect changes in performance.

63. We support the concept of national envelopes but we consider that there is a need for care to ensure that the size of the dividend and the formula for its allocation among Member States reflect the objectives of the reform process and do not result in a perpetuation of either the current Wine CMO Budget or the current pattern of subsidies across Member States and wine regions. We would wish to see spending on the wine sector reduced over the medium term. To achieve this, both the overall sum and the individual allocations to Member States should be reviewed prior to the adoption of the EU's multi-annual financial perspectives[21] in order to audit the results which have been obtained from the funds provided and to determine what, if any, further EU funding may be needed in order to revitalise the wine industry.

UTILISATION OF NATIONAL ENVELOPES

64. The Commission sought to reassure us as to the utilisation of national envelopes. Ms Naesager told us that "we have really tried to make the national envelopes restrictive and, of course, there will be definite criteria that will need to be respected. Member States will need to make [up] the national envelopes. They will have to be communicated to the Commission, of course, and there will be a check on how they spend the money" (Q 341). Such restrictions will be particularly important if we are to avoid re-creation of the present problems of the wine sector, particularly through a re-introduction of subsidised distillation.

Crisis Management

65. We were pleased to hear what Ms Naesager had to say about the spending of funds from national envelopes on "crisis management" measures. She told us: "It can be to set up a mutual fund, it can be to pay farmers for the loss of income, and it can also be insurance against natural disasters. This is one thing. When we say 'crisis management', we do not talk about crisis distillation. That is out, even though some Member States would like to see it in" (Q 341). On the understanding that it is focused on harvest insurance and will not allow the reintroduction of subsidised distillation through the back door, we support the use of national envelopes for crisis management measures. We urge the Commission, however, to stand fast on this restriction and to ensure that the new regulations make clear that the purpose of crisis management support is to help the industry to manage its own crises, not to remove the risk from commercial decisions. Wine sector funding for this purpose should be regarded as a short-term measure.

Green Harvest

66. "Green Harvest" is a different matter. What is proposed here is that, where there is an excess of supply over demand, wine growers should be able to pick the grapes from their vines in an unripe state and receive funding, from national envelopes, for disposing of them. We see no difference of principle between this and subsidised distillation: it is just another means of intervening in the market and buying up a crop for which there is no demand. To abolish distillation but to permit "Green Harvest" would leave open the way to intervention subsidies by the back door and thereby negate an important element of the proposed reforms. We do not support the use of national envelopes for "Green Harvest" measures.

Restructuring

67. Restructuring, to improve the efficiency of the wine industry and to make it more responsive to the market, is already a substantial element of the Wine CMO budget (See Paragraph 12). According to Emmanuel Jacquin, Head of the Wine Reform Unit at the European Commission, to date some 150,000 hectares—5 per cent of the EU area under vine—have been restructured in this way (Q 295). It has included such measures as the planting of new varieties of grape which are better suited to the market and the amalgamation of holdings to improve efficiency of production.

68. According to Robert Lindo, Chairman of the UK Vineyards Association, restructuring—which he defined as "improving the quality of production, investment in equipment, investment in training and knowledge and marketing"—should be the priority area for EU expenditure on the wine sector (Q 591). Other witnesses shared this view. Eva Corral, of COPA-COGECA, believed that the process needed to be more market-focused. Referring to restructuring as "the connection of all the sectors", she continued:

"Until now the reform has just been addressing the producers but has not been linked to the market. We have been having a lot of restructuring but the restructuring is not linked to whether these products or these varieties have a market. In some places we have found ourselves with, for example, a lot of white wine because there was a demand for white wine, and sadly there has been too much re-conversion to white wine and now there is no market" (Q 223).

69. While we support the continuation of grants to improve the competitiveness of the wine industry, we consider that, if the interests of EU taxpayers are to be protected, such grants need to be both tightly defined and audited. There is already substantial investment in restructuring—some €450 million (about £300 million) a year, accounting for more than a third of Wine CMO spending. Yet it is clear to us that little has been achieved as a result in terms of improving efficiency and competitiveness and reducing the dependency of the industry on EU subsidies. That the problem of over-production persists suggests that results commensurate with the investment have not been obtained. It is important therefore that any future investment should be conditional on the demonstration by the applicant of a sound business case, a key element of which should be an improvement in the connection between production and the market. Robust post-investment audit arrangements should also be put in place.

70. We support the continuation of grants for restructuring of the wine industry, but we would wish to see such assistance restricted to projects for which a sound business case can be made and robust arrangements made for audit of the results.