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23 Mar 2016

Simon Reilly considers what would happen if Britain voted in June to leave the European Union. 

I have a significant birthday this year. There are two main events happening as a result. One is a five-day trip to Paris to watch the Euro 2016 football finals with seven of my school mates in early June. The other is a long weekend in San Sebastian in September, wining and dining my darling wife to earn the brownie points required to secure approval for the Paris trip.

Both of these were booked last summer when the EUR/GBP exchange rate was a healthy-looking 0.70. Hotels for both trips were booked on a 'pay on check-out' basis. That was my first mistake. Unbeknown to me at the time, it turns out there is a fairly important event happening in between these two trips: the UK referendum on EU membership on 23 June. This has significantly increased the cost of my Paris hotel and may have the same impact on the San Sebastian lodgings as well.

Since those heady days of 0.70 EUR/GBP, the pound has plummeted in value to 0.78 (as of 17 March 2016). Yes, that's more than 10% added to my holiday bill. The markets are wobbling. Boris Johnson is not helping either. The pound went as low as 0.79 last month after he announced he was supporting the Brexit 'yes' vote.

Aside from blowing my holiday budget for the year, what does Brexit mean for the cost of my not insignificant wine habit?

Before the vote

Between now and 23 June, markets will continue to be volatile. I asked the foreign exchange desks of three UK banks their views on Brexit. One bank said the pound was undervalued due to recent Brexit speculation (thanks again, Boris) and would recover to 0.73 by the end of June and the other two said the pound was overvalued and would weaken to 0.82-0.83 over the same period. That sounds pretty volatile to me….

By applying some schoolboy maths, I find that if I take those three opinions and add today's rate (17 March) of 0.78 to the sample, the average is 0.79. So let's use that as a base position.

When Bordeaux 2015 en primeur prices start dribbling in next month, if the rate is 0.79 then the UK merchants will have to apply an 8% increase on last year's prices on a like-for-like basis (this is based on a comparable rate of 0.73 as of 30 April 2015), as displayed in the graph below.

graph-2.jpg

Given the hype around the 2015 vintage, the prices in euros are likely to be up on last year so this 8% will be applied to an even higher base. I wouldn't have thought the Bordelais will feel sorry for us Brits and hold prices down, would you?

Colin Wills, of London independent wine merchant Uncorked, will be offering 2015 Bordeaux en primeur as usual but he has concerns. 'Bordeaux seems to be working hard to prevent all sales, and the pound's collapse certainly isn't going to help', is his view. This could make for a very expensive en primeur campaign in the UK for consumers and merchants alike. It is not likely to be good news for the Bordelais either, given the battering the reputation of Bordeaux en primeur has taken in recent vintages. This may lead some UK wine lovers to pass on Bordeaux 2015 in favour of wines from earlier vintages which are ready to drink and available at lower prices.

What will happen if the UK exits the EU?

The impact of Brexit on UK consumers is even more complex in the event of a 'yes' vote. Continuing on the topic of exchange rates, the pound is likely to continue to weaken in the event of a Brexit. Deutsche Bank reported in February 2016 that 'a UK exit from the EU is likely to negatively impact sterling and may see our existing forecasts of EUR/GBP 0.82 by the end of 2019 front-loaded'. Another bank I spoke to expects the pound to weaken sharply by 10-15% in the event of a Brexit vote, which would push the pound more towards 0.90. So the cost of wine from the EU is going to continue to rise for UK wine drinkers (along with my aforementioned brownie points).

Beyond exchange-rate impacts, the wider impacts of Brexit for UK wine drinkers may be enough to make them feel as though they have the mother of all hangovers. Brexit will be subject to extensive negotiations on a range of issues, meaning it is impossible to determine the long-term effect for UK wine consumers. However, there is a clear worst-case scenario, which is likely to be the base position until a new trade deal is agreed between the UK and EU. Owing to the introduction of trade tariffs on exiting the EU, European wine is likely to become a lot more expensive to UK consumers following a Brexit vote. In The Economic Impact of EU Membership on the UK by Gavin Thomson and Daniel Harari, a House of Commons Library report from 2013, they consider the options for the UK in the event of Brexit, and state:

'Because the UK has negotiated as part of the EU at the World Trade Organisation (WTO), it is likely that it would inherit the EU's tariff regime at the time of leaving, meaning, at least initially, higher prices would be faced by consumers buying imports from the EU and those countries with which the EU has trade agreements. Without any change, a 32% tariff would be levied on imports of wine, for instance.'

Yes, you read that correctly, 32% ...

This is a worst case, however. An alternative is most likely to be agreed as part of a negotiated position between the UK and EU following Brexit. The UK market is such a big market for Spanish, French and Italian wine producers that you would expect that the removal or significant reduction in the WTO's 32% tariff would have to be part of any deal.

Who knows how long this could take, however. Plans are in place for a two-year period before Brexit would kick in to allow for an arrangement to be negotiated, but Greenland took more than two years to agree on fishing quotas when it left Denmark (and the EU). Given the plethora of trading between the UK and EU, it is likely to take a lot longer than two years for the UK to agree a negotiated position, so we could be stuck with the WTO tariffs for quite some time.

The agreement, when reached, could look similar to the free-trade agreement between the EU and Georgia in 2013, which removed tariffs on Georgian wine imported by the EU. This has led to an influx of Georgian wine into the UK in the last few years, including many fashionable orange wines. Georgia's case is different, it has never been in the EU. One wonders why the EU would make it easy for the UK to leave the EU without some pain inflicted. Allowing the UK to pick and choose the best bits of EU membership without the annoying bits would probably see other members run for the door.

So what are we going to drink?

In the event that a Brexit leads to an initial increase in the cost of European wine in the UK, wine drinkers will obviously look at alternatives. Initially, wine from outside the EU should look a lot more affordable in relative terms. As Jancis pointed out recently in Save your pennies, South Africa in particular is a bargain hotspot right now. It has always offered value but the current weak Rand makes it even more affordable for UK drinkers. Last time I was in South Africa in 2013 I got 14 Rand to the pound, Right now you get 24. That makes the wine 40% cheaper than three years ago.

Closer to home, if we do vote as a nation for Brexit, there is likely to be a surge in support for British produce. This, combined with the relative value of English wine compared with EU equivalents, should create a great opportunity for English wine sales to grow in the UK, but what benefits of EU membership would it miss?

The EU has provided millions of euros of funding into the development and promotion of European wine in recent years (see EU funds flow east), but the UK has yet to see much from this. To date the funding channeled into English wine has been limited to small education programmes such as Wineskills and pockets of development funding for individual estates, including Hambledon (see An awfully big English adventure). The numbers have been in the thousands rather than the millions of euros that have been offered elsewhere in Europe.

Jo Cowderoy, General Secretary of the UK Vineyards Association, told me about the difficulties English wine has had in securing investment. 'EU funding is difficult to access. One issue is that it is very difficult to understand what funding is actually available. Another is that the process of applying for funding is very complex, time-consuming and expensive. Given that there are obviously no guarantees of success, the effort and cost required has put many people off applying at all.' It sounds as though the English wine industry has succeeded without much EU support to date then.

There will be negative effects for the English wine industry, however. The removal of free trade with the rest of the EU would most likely have a negative impact on exports to these markets. The restriction in low-skilled, migrant labour after a Brexit vote is likely to increase labour costs in the UK. This would undoubtedly have a negative impact on the cost base for wine producers.

So what can we take from this debate? The only thing that is clear is that nobody knows what will happen in the event of a Brexit vote. Initially, however, wines from the EU will be more expensive for UK wine drinkers due to a weakening pound and the introduction of trade tariffs.

With this in mind, here are three wines I have tasted recently which we can all turn to in a Brexit world without breaking the bank:

Clos Saint-Vincent 2010 St-Émilion An obvious alternative to expensive Bordeaux 2015 is to explore recent good vintages such as 2010. This is a good example. All about plum and liquorice flavour, it is very soft, round and approachable for its age. Nice acidity on the finish gives it real balance.
£22.95 www.slurp.co.uk

Hattingley Valley Blancs de Blancs 2010 Hampshire We'll all be buying British if we vote for a Brexit, so this is an obvious choice. Very easy-going, a perfect aperitif. It has flavours of spiced pear and apple, with a long, lemon-tinged finish. Compared favourably with a Louis Roederer NV tasted alongside it, which felt a bit dry and less fun in comparison.
£34.95 www.hattingleyvalley.co.uk

Secateurs Red Blend, AA Badenhorst 2012 Swartland The weak rand will make future vintages of this consistently good-value red even better value. Unmistakably South African nose of sweet berry fruit and leather. Peppery spice on the palate combines nicely with the sweet fruit. Bit of polish on the finish with a grippy, orange peel tartness that balances the sweetness.
£10.95 www.stonevine.co.uk