July 4 (Bloomberg) -- The European Union plans to rip out almost 6 percent of its vines in an attempt to reduce the wine surplus produced every year, overhauling a wasteful budget and an industry struggling to compete with the New World.

Nations such as France, Italy and Spain, which together with their European neighbors produce and consume three-fifths of the world's wine, are suffering from falling sales at home and a growing threat from rivals in California, Australia and Argentina as annual exports stagnate at about 4 billion euros ($5.45 billion).

The European Commission today backed a plan by Agriculture Commissioner Mariann Fischer Boel that would change the way the current 1.3 billion-euro annual budget is used. She wants to slash the 500 million euros spent compensating growers for the one liter in 10 that no one wants and increase the budget for marketing bottles and grape varieties.

Fischer Boel said her proposal ``will reinvigorate the European wine sector and put it back where it belongs, that is, back on top of the world. Everybody recognizes that a profound reform of the wine sector is needed, so we have to bite the bullet and do what we think is the best solution for our producers and our consumers,'' she told journalists in Brussels.

The plan still needs EU governments' approval. Fischer Boel said she anticipates ``very emotional, sometimes very heated'' discussions among member states about the revamp.

Ending Quotas

The commission, the 27-nation EU's executive arm, wants to scrap a quota system and export subsidies as part of plans to gradually overhaul the way vines are planted and wine marketed. The plan would compensate farmers for ripping out 200,000 hectares (494,200 acres) of poorer quality vines, out of the total 3.6 million hectares now planted with wine-variety grapes.

The problems of overproduction and falling sales were exacerbated by a bumper 2004 harvest. Unless the plans are implemented, the bloc will have to pay to destroy as much as 15 percent of its annual production, or 1.3 billion liters (340 million gallons), the commission estimates.

Today's plan won't solve the problem, European farmers' groups say. Abolishing compensation for pouring away the surplus ``from day one'' won't leave producers time to adjust, said Jean-Louis Piton, chairman of discussions on the wine reform at European farmers union COPA-Cogeca.

New World Model

``The proposal's backbone is to introduce the wine model of the New World'' into the EU, said Piton, a wine producer from the southeastern Luberon region in France. ``This proposal highlights the corporate aspects, not the interests of the farmers or the land,'' he told reporters in Brussels yesterday.

Wine isn't an industrial product, says COPA, because it's mostly produced by small independent growers tied to very specific locations and aged on their premises.

On average, 71 percent of European producers cultivate less than 5 hectares of vines, according to COPA. That's 10 times smaller than the average plot in Australia. With a productive lifespan of about 45 years, vines are critical to the tourism industry and landscape in many regions.

A group of quality-wine producers from France, Italy, Portugal and Spain also criticized Fischer Boel's proposal.

Unambitious

``Whereas the producers of quality wines agree that a reform of the wine common market organization is necessary, they believe that the commission's proposal includes dangerous provisions for their sector and lacks ambition,'' the five organizations said in a joint statement today.

The commission plan suggests allowing any practice recognized by the International Organization of Vine and Wine. European wines are linked by grape variety to particular regions and their soils. Changing the way wines are produced risks industrializing production and basing quality on trademarks, as in the U.S., South America or New Zealand, COPA says.

Fischer Boel also wants the EU to change labeling rules to allow grape varieties to be named on all bottles rather than only on wines that are recognized as high quality. Under existing rules, grape names such as Chardonnay or Sauvignon aren't allowed on labels of table wine.

Today's plan calls for a budget of 430 million euros for the 2008-2009 season to reimburse farmers for ``grubbing up,'' or ripping out, the 200,000 hectares of vines that contribute to the surplus. In 2005, the EU paid a total 506 million euros to turn unwanted wine into disinfectant and industrial alcohol and without a reform, the surplus wine production would reach almost 13 million hectoliters every year, Fischer Boel said.

`Entirely Voluntary'

``The grubbing up scheme is entirely voluntary,'' she said. ``It will not be decided by Brussels, it will not be decided by member states.''

Competition from imports has increased more than tenfold within a decade. Imports into the EU amounted to 85 million liters in 1993 and reached 950 million liters by 2004, says the Brussels-based Comite Europeen des Entreprises Vins.

Along with greater competition, the EU faces falling domestic consumption as drinking habits change. Vinexpo, a Bordeaux, France-based wine exhibitor and promoter, estimates that in the five years to 2010, wine consumption in France will fall 9.3 percent and in Spain, by 7 percent.

Wine consumption in France has dropped 60 percent in the last half-century, says CEEV, which represents 90 percent of all EU wine exports. The French have moved away from having wine at most meals to occasional drinking and higher-quality choices, according to Jose Ramon Fernandez, CEEV's secretary general.

By value, the U.S. was the biggest market for wine sales at $19 billion in 2005, Vinexpo says. France followed at $8.9 billion and the U.K. with $8.5 billion in sales out of a total world market worth $91.6 billion that year.

``The logic of the proposal is good,'' said wine-producer Piton. ``It's not that the model of the New World doesn't work, but we can modernize our traditional systems rather than having a brutal change.''

To contact the reporter on this story: Warren Giles in Geneva at wgiles@bloomberg.net

Last Updated: July 4, 2007 09:54 EDT