Reflections on the Political Economy of European Wine Appellations

Today’s European wine policy is centered on a system of appellations, implemented as geographical indications (GIs), that entail signifcant technological regulations— restricting the varieties that may be grown, while imposing maximum yields per hectare and other rules regarding grape production and winemaking practice. This paper outlines the historical development of European wine policy under the CAP, and presents a more detailed analysis of the economic consequences of the rules and regulations under the appellation system. The introduction of these rules and regulations was probably benefcial initially, both for their didactive efect on wine producers and consumers and as a way of overcoming a signifcant “lemons” problem in the market. However, those same rules and regulations are much less valuable today, given (1) the potential for alternative sources of information to solve the lemons problem, and (2) evidence that the appellation system per se might not be efectively serving that purpose as well as it once did, while some of the regulations impose signifcant social costs. Yield restrictions, in particular, are economically inefcient as a way of enhancing and signaling quality (their ostensible purpose) and as a way of restricting total supply to support market prices and thus producer incomes (a signifcant motivation). The inherent weaknesses of the policy design are compounded by failures of governance. A less heavy-handed approach to policy would allow more scope for the market mechanism to match supply and demand for this signature product from European agriculture.