As you know, Europe is in a pickle: a financial crisis is engulfing the European Union, and there is growing fear that the euro zone may be headed for a breakup. On Monday, Wolfgang Münchau, an influential columnist for the Financial Times, said European leaders had “10 days at most” to find a solution to the crisis and that failure to do so would risk a “violent collapse” of the euro zone. It’s now Thursday, so make that seven days. And what would a breakup entail? The consensus seems to be that the euro zone wouldn’t crumble entirely; rather, one or possibly several countries would leave it, abandoning the single currency and reintroducing their national currencies. At the moment, Greece is seen as the likeliest defector, but two pillars of the euro zone, Spain and Italy, which are also choking on debt, could be forced out, too. It may be time for a tweaked version of that R.E.M. classic: It’s the end of the euro as we know it….
With the Unthinkable suddenly having become Thinkable, companies worldwide are now preparing for the possible disintegration of the 17-nation euro zone. Because my mind seldom strays far from my Riedel, I have been giving some thought to what a euro zone breakup would mean for the wine industry. Spain and Italy are home to thousands of wineries, whose contracts, bank accounts, and debts are denominated in euros. Can you imagine the difficulty and cost of converting all of these things back to pesetas and liras? It is when you frame the issue in “micro” terms that you appreciate just how messy a splintering of the euro zone would be, which is why Merkel, Sarkozy, and company will probably find a way out of the crisis, or at least a way of forestalling Doomsday. Yesterday, the Federal Reserve and several other major central banks lowered borrowing costs for banks in an effort to ease strains in global credit markets, but that may just be a Band-Aid at this point.
Curious to get the view from crisis central, I emailed Victor de la Serna earlier this week. De la Serna, in addition to being a deputy editor of the Spanish daily El Mundo, is one of Spain’s leading wine critics and a vineyard owner himself. De la Serna told me that people in the Spanish wine industry are simply not buying the Armageddon scenario: they believe the euro zone will remain intact and that Spain will remain a member. “No one is actually thinking in Spain that the eurozone will break up and even less so that Spain will be forced out of the euro,” he said. The real concern at the moment is the specter of a second recession in just three years, which would deal a heavy blow to an already ailing wine sector. And if the worst did come to pass and Spain exited the euro and reinstated the peseta? De la Serna indicated that it would be a manageable problem: he said that virtually all the debt carried by Spanish wineries, for instance, originated with local banks, and those obligations would simply be redenominated in pesetas.
I also spoke by phone with Harmon Skurnik, president of Michael Skurnik Wines, an acclaimed Long Island-based importer and distributor whose portfolio includes many Spanish, Italian, and Greek wineries. I was interested to find out what if any contingency plans his firm has made in anticipation of a possible euro zone collapse. Skurnik told me that they typically hedge their currency risk six months out but have taken no precautionary measures on account of the European crisis. While noting that a euro zone crackup would likely have horrible political and economic consequences for Europe, Skurnik said that in the short term, at least, it could be a boon for American wine consumers. If, for instance, Spain were to quit the single currency, a reintroduced peseta would inevitably be significantly devalued, which would lower the cost of Spanish wines here.
Skurnik suggested that struggling producers in Spain, Italy, and Greece might be happy to see their countries exit the euro precisely because it would make exports more competitive. To test that proposition, he emailed several importers he works with. Christopher Cannan of Europvin, who represents a number of estates in Spain and Italy, said that abandoning the euro would probably help wine exports from those countries, but he believes the EU will find a way out of its current predicament because the alternative is so grim. Ted Diamantis of Diamond Importers, which specializes in Greek wines, said he personally would “welcome a return to the drachma” if it meant lower costs. But he added that Greek wineries have to import corks, bottles, and other supplies and that the cost of these items would go up if Greece were to leave the euro zone. So bringing back the drachma might not be such a tonic, after all.
And any benefits that quitting the euro might yield in terms of overseas sales would very likely be offset by a dramatically worsened domestic economy. Several months ago, the investment bank UBS issued a report looking at the economic price that member-states would pay for leaving the euro zone. It predicted that if a “weak” country such as Greece were forced out, it would default on its debts, its banking system would collapse, and its GDP would be sliced in half—in short, it would suffer a total economic meltdown. Needless to say, that would not be good news for the Greek wine industry. And it isn’t as if the United States would be sheltered from the fallout of a euro zone implosion: in fact, the resulting financial turmoil would probably make the events of 2008 look like a hiccup by comparison. I’m all in favor of cheaper wines, but not at the cost of a second Great Depression, thanks.