Europe Withering on Grapevine

06/15/2009 12:58 pm EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

A recession that has squeezed wine growers and restaurateurs poses a renewed threat to European investors, writes Gordon Pape in the Internet Wealth Builder.

Traveling through the bucolic countryside of Burgundy, you'd never know there was a recession on. The tiny villages along the road… are clean and prosperous looking. Up on the slopes, where the grapes that produce some of the world's most coveted and expensive wines are grown, the lush vineyards are lovingly tended.

It almost seems as if you have come to an island of tranquility in a troubled world—that is, until you talk to some of the people responsible for actually selling the output of these fabled vineyards.

"Sales are down maybe 25% or 30% in Burgundy," one sales manager moans. "We're a large house, so we'll be all right. But for some of the smaller producers..." Her voice trails off, but she wasn't the first to say that some growers who depend on the sales of grapes from their tiny parcels are hurting.

"Prices have held up so far, but we're starting to see some downward pressure," says the vice-president of marketing of one of the houses that exports a significant part of its production to Canada. "Everyone will be watching the prices at this fall's auction to see what happens."

The concerns of the Burgundians were confirmed by the French Agriculture Ministry last week when it released figures showing that exports were down 15% by volume and almost 30% by value in the first quarter of this year. Even the French themselves are drinking less of their national beverage; domestic consumption was off almost 10% in 2008.

Right now, the casual visitor sees nothing of this financial stress. The town of Beaune, the center of the Burgundy wine trade, is bustling. … The shops seem busy and the tourists are everywhere. But there are a few indications that the troubles of the wine industry are trickling down. One highly rated but expensive restaurant I visited was almost deserted at lunch time. Plush seats on the patios of the pricier wine bars are empty. Shops are promoting 50%-off sales, even though the tourism season is just starting.

[Meanwhile,] in Lyon, France's third largest city, the famous Paul Bocuse market, which is filled with high-end specialty food retailers, was almost deserted on what would normally be a busy Saturday morning. A reservation at the up-and-coming two-star restaurant of Nicholas Le Bec? No problem. It would normally have to be made months in advance. Want to stay at a four-star hotel? There are plenty of rooms available.

The reality is that France, and the rest of Europe, is suffering every bit as much as North America, perhaps even more. Unemployment in France jumped 2.4% in April and the country now reports 2.5 million people are out of work. Youth unemployment is especially high, increasing by 42.5% in the past year.

Normally, unemployment rates at this level would bring the French out into the streets in protest. But reaction so far has been surprisingly muted apart from a few highly publicized executive hostage-takings, all of which ended peacefully. An attempt to organize a national day of protest in early May fell flat. People seem to believe that there is nothing to be gained by rioting, and they're right.

Governments across the continent are spending billions of euros in an attempt to kick-start the economy, and their efforts are being rewarded with an upswing in consumer and business confidence. The European Commission reported [recently] that the overall Economic Sentiment Indicator rose 3.1% in April, the second straight monthly increase.

European stock markets have reflected this "worst-is-over" philosophy. The Dow Jones Stoxx 600 Index, which tracks a selected list of small-, mid-, and large-cap companies from across Europe, is up about 30% from its early March low and is in positive territory for 2009.

Many economists are suspicious of the spring rally and question its sustainability.  The reasons for the concern include an expected continued squeeze on margins, a decline in earnings [that could reach] 20%, and a rise in the value of the euro against the US dollar, which will hurt exporters.

The overall message is that if you have not profited from the rally in the European markets, don't jump in now. We could see a significant correction this summer as reality replaces hope.

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