EC rules against German spirits subsidy

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Related tags: European union

The European Commission has decided that a German subsidy scheme
for the producers of Kornbranntwein, a brandy made out of corn, is
in breach of European Union State aid rules because it distorts
competition with other brandy producers.

Despite this however, the Commission has agreed to give the German producers until 30 September 2006 to adapt to competition.

The investigation arose from a complaint submitted by six industrial producers of grain brandy in Germany who believed that they were being put at a competitive disadvantage vis à vis their rivals in the agricultural sector.

The complaint followed the entry into force of the German Budget Consolidation Law ("Haushaltssanierungsgesetz") of 22 December 1999, which was designed, among other things, to adapt the existing sprits monopoly by abolishing the operating aid granted to industrial grain brandy producers as from 2006.

Farm producers would continue to receive state support through the purchase of grain brandy by the monopoly operator at much higher prices than market prices.

The Commission has noted that a Council regulation of 1989 (Regulation 1576/89) decided that grain brandy fell under the normal competition rules of the EU Treaty.

Today's decision accepts, however, a phasing-out period, therefore allowing all German grain brandy producers to continue benefiting from the existing aid scheme for a transitional period of two years. The aid scheme must be abolished by 30 September 2006 at the latest.

Article 88(1) of the Treaty stipulates that the Commission must, in cooperation with Member States, keep under constant review all existing aid systems to check their conformity with EU rules.

This could be bad news for the German alcoholic drinks industry, which has been in gradual decline. Less disposable income in a poor economic climate has seen consumers exercising caution and either cutting back on more indulgent purchases, such as alcohol, thus affecting value growth.

However, prosperous pockets have emerged. Spirits-based FABs experienced dynamic triple-digit growth in 2002, attributable to their young and trendy image. Bacardi Rigo and Smirnoff Ice have proved particularly popular.

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