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Eurocalypse Now?

2011 December 1
by Mike

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.

22 Responses leave one →
  1. June 14, 2014

    You could top the cupcakes with icing in a spider’s web
    design and place a jellied sweet spider in the centre of the web.
    Know for sure that the correct forms are being used.
    And distortions in the template are what manifest
    into brain imbalances in the biological system.

  2. December 2, 2011

    Very nice article! You really did a great job! Cheers for you and keep up the good work.

  3. December 2, 2011

    Alfonso, I agree completely–wine is a very minor concern when measured against what a collapse of the euro zone might mean for global economic and political stability.

    It’s always good to live in interesting times, but the past 10 years have been altogether too interesting, I think; a little peace and tranquility would be nice.

    That is interesting development re Italian wineries, though the direct method effectively cuts them off from the American market, or most of it.

  4. December 2, 2011

    Tony Cotton, thanks for stopping by. Greek wines (but not retsina) have been getting some attention here in recent years. They’re pretty inexpensive as it is, so I’m not sure how much added of an added boost they would get from a return of the drachma and a huge devaluation. And, again, if that UBS report is even close to accurate, the cost to the domestic economy would overwhelm any trade benefits.

  5. December 2, 2011

    Thought provoking post, thanks for that. In the world I live, we haven’t even begun to go there. Is it a possibility that all of Europe will fragment? Of course. But if it does, I reckon we aren’t going to be worrying about whether we can get our Pinot Grigio or Tempranillo. There will be bigger issues, such as containing a major ground conflict

    What is really interesting in this process is that I see Italian wineries breaking out of the traditional importer roles and trying to “go direct”. There are savings in that model but there are also pitfalls. But the momentum is gaining in that area.

    My Italian friends inform me that personally they are not heavily in debt. The Italian compunction is to pay it off. But if you have a bright shiny new (paid off) suit and you’re in a boat with a leak, it’s going to get wet.

    All this to say, it is an ongoing spectacle. I just hope it doesn’t turn into another war

  6. December 2, 2011

    Hi Christian, thanks for the comments. I don’t see how the euro zone holds together in the long run. I was pretty skeptical from the start about the euro, for the same reason that people far more knowledgeable than I, such as Paul Krugman, were dubious–monetary union without much greater fiscal and political integration was a formula for trouble, and trouble has obviously now arrived. I agree with you: for their own sake and for the sake of the EU, some countries probably need to leave the euro zone. But even if that process could be managed in an orderly fashion, it is a daunting task–politically, economically, and culturally. This whole thing is a real mess, with no easy way out.

    Francois, the euro will likely survive, but as I said, I think some countries will end up leaving the euro zone. However, you are right about the larger problem here–economic anxiety and resentment is obviously a very potent force at the moment throughout the West, and it could have some pretty scary political ramifications.

  7. mauss permalink
    December 2, 2011

    The biggest actual problem is not so much the euro situation : it will survive. It is to know up to which point the working class will accept to share his income, thru the channel of the State, to cover the needs of the unemployed people, a growing number.

  8. December 2, 2011

    A major debt restructuring, new currency and major devaluation is the only promising future for countries like Greece. I am sure it will happen. And it needs to happen for a large group of countries. At the same time, the Euro will strengthen. This will change the relative prices of European wines. Austrian wine (remaining in the Euro zone) will become expensive and Spanish wine (leaving) will become cheap. But I think the death struggle of the Euro zone will take much longer than 10 days. For the time being the ECB will assure that the Euro zone will remain intact.

  9. December 2, 2011

    Bob, thanks for the very kind words; greatly appreciated. It was disappointing, of course, to lose the Slate gig, but it opens the door to other possibilities. And I’m having a lot of fun with the blog–we have a wonderful group of people posting here, which makes it completely worthwhile.

  10. December 1, 2011

    Markus, I suspect that wineries are not taking very many precautions at this point, and frankly, I’m not even sure what they can do. From what I’ve read in the Financial Times and elsewhere, it is really just major international companies that are starting to make contingency plans; small businesses appear to be just watching and hoping for the best.

  11. Bob R. permalink
    December 1, 2011

    Mike, your postings, such as this one, are so informative and well-written. I assume that having Slate cancel your column is just a blip on your career, and that besides whatever books you’re working on, some magazine will hire you as a columnist. Assuming that’s something freelance writers even strive for these days. Keep up the good work. I’m happy that you continue to find writing these blog postings worthwhile.

  12. December 1, 2011

    Mike, thank you for responding. I agree very much with your comment – and your post raises some serious questions if the wine industry (and this of course holds true for other segments of the world economy) is at all prepared for such an event. You tackled a very important concern, I was simply surprised that the reactions of the well respected people you talked to showed a surprisingly “relaxed” stance. I might interview some wineries to learn more about their thoughts and plans. Thank you for raising the issue.

  13. December 1, 2011

    Markus, thanks for stopping by. I think you are right. Frankly, I was surprised to hear from Victor that people in Spain are so confident the euro zone will remain intact, and I was also surprised to hear that he thinks a transition back to the peseta wouldn’t be a complete nightmare. I think the banking system would be put under incredible strain, both logistically and also because of the euro exposure. As I said, the UBS report predicted that Greece’s banking system would collapse if Greece exited the euro zone. As for the currency issue, if any of these at-risk countries–Greece, Portugal, Spain, Italy–reverted back to their national currencies, the devaluations could be swift and brutal. UBS estimated that a weak-country’s currency, such as the drachma, would instantly see a 50-60 percent deprecation. So, if the euro zone falls apart, I don’t imagine the transition would be very orderly; it could be downright cataclysmic.

  14. December 1, 2011

    I am less sure that things would be quite as simple. Let’s take a look at Greece: I think it would be realistic to assume that the wineries will take into account that their “new” drachma currency would be very volatile for the medium future. They would be prudent to price in a risk premium, as their cost base will be effected. I very much doubt that prices would drop in a 1:1 ratio. Uncertainty always carries a high price. Just my simple 2 cents on a more complicated issue.

  15. December 1, 2011

    Interesting article…nice to see the eurocrash from a wine angle. One thing’s for sure. If the Euro splits up, sales of German Blue Nun are going to tank in Spain, not that they drink much of the stuff anyway. And does anyone drink retsina outside of Greece? My guess is that even if the drachma euro exchange rate was 579:1, they’d still struggle to flog any.

  16. December 1, 2011

    Nice! Maybe I’ll even invite him to post a response here.

  17. SteveLG permalink
    December 1, 2011

    of course i’m looking forward to reading felix salmon’s views on this.

    ; )

Trackbacks and Pingbacks

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