Jean Monnet Center at NYU School of Law

Is Europe's Glass Half-Full or Half-Empty?

The Taxation of Alcohol and the Development of a European Identity [1]

Gregory P. Lubkin

©Copyright: Gregory P. Lubkin, 1996.

Table of Contents

I. Introduction
II. European Integration and a European Identity
III. The Role of Alcoholic Beverages in constructing a cultural identity.
IV.The Role of Alcoholic Beverages in the European Economies
V. Factors in the Taxation of Alcohol
VI. Other Forms of Regulation on Alcohol Production and Consumption
VII. The European Court of Justice Jurisprudence on Alcohol Taxation
VIII. The Council Directives on Excise Taxation of Alcohol
IX. The New Regime: Half Empty or Half Full?
X. Conclusion: Constructing a European Identity
European Legislative Materials
Cases Cited

I. Introduction

Barring unpredictable events, the institutional process toward a European union will be continuous rather than discontinuous. It is not likely that we will see a grand and pompous gathering paving the way for a treaty that once and for all solves all institutional questions. We are much more likely to see a gradual and evolutionary development where Europeans will shape some sort of common attitude.[2]

Thus wrote Orstrom Möller, a senior Danish foreign affairs official, in assessing the future of European integration. This incremental vision reflects an acknowledgement that overnight changes are unlikely in the development of a collective identity.

Most nations, regions, and peoples of the world still retain a sense of separate cultural identity notwithstanding the increasingly rapid integration of the global economy. When trade treaties such as GATT and NAFTA are negotiated, they must take into consideration deeply-rooted cultural preferences. Generally, trade treaties, like most international agreements, tackle the easy questions first and use transitional compromises or ambiguous language to leave the most sensitive ones for later resolution. Europe is the region of the world that has moved farthest towards integration, and the European Union has (as the very name suggests) progressed enough that some very touchy subjects have been put on the table. It is in the handling of these sensitive matters that we can see indicia of the pace and extent of integration, for good or ill. Governments may be quick to adopt friendly rhetoric, procedures that bring them a clear advantage, or even principles and applications that do not affect what those governments consider to be vital interests. However, when the core prerogatives of sovereign states and the most cherished cultural traditions of their peoples are challenged by the process of integration, the manner in which the issues are handled can provide a useful reflection of how far things have actually progressed--and what may follow.

This paper looks at an issue which encompasses some of the most sensitive issues for governments and their peoples--the taxation of alcohol, particularly alcoholic beverages. The sensitivity of this issue relates to both the prerogative of government to impose taxes as they see fit and the role that alcohol plays in a given culture and society.

Taxation is one of the most important activities of any government, because it is the function which, broadly speaking, allows the government to fund its own activities on behalf of its population's welfare. Any kind of taxation is controversial, because it takes money away from some members of that population and gives it, directly or indirectly, to others. Thus, tax laws can be used not only for revenue collection but also for shaping social and economic policy by encouraging some activities (taxing them lightly, if at all) and discouraging others (taxing them heavily). Alcoholic beverages are also controversial, because their consumption can raise significant issues of morality, public health, and even public order, as well as basic economic issues of production, distribution, and market competition generally.

This paper suggests that the harmonization of Member States' taxation of alcohol, particularly the excise taxation of alcoholic beverages, provides a good index of European integration and identity development at a level of ongoing daily functionality. Unlike more dramatic crisis situations, the issues raised in the taxation of alcohol will not pass, or even be shelved for long, once a particular resolution has been reached--until, perhaps, full integration or disintegration has occurred.

This paper also suggests that the enactment of secondary legislation harmonizing alcohol excise taxation indicates the Member States of the European Union are learning to work together with what Møller might call "some sort of common attitude" to transcend, at least minimally, deeply-rooted national and regional particularism.

II. European Integration and a European Identity

The politics of collective identity has become a major issue in today's Europe. Any understanding of the European political scene must recognize the crucial role played by nationhood as a focus of collective loyalty. However, ... [c]ulture and polity in Europe are not congruent with one another and, at a time of uncertainty, culture takes center stage as a battleground for the elaboration of identity politics.[3] In recent years, as the process of European integration has extended beyond a purely economic Common Market or European Economic Community to a Community and even a Union[4], observers such as Philip Schlesinger, quoted here, have expressed concerns about the need for development of a "European" identity that might transcend entrenched social and cultural divisions. One social scientist queried, "How can an integrated Europe be achieved? How are national and European identities related to each other? Is it the cultural background or the level of socio-economic development that signifies the greater problem--or the keener motivation--on the way to integration?"[5]

In the article cited above, Philip Schlesinger went on to note that "Europe's geocultural scope is far from clear.... At the heart of the debate about Europeanness are questions about what kinds of political, economic, and cultural attributes both individuals and collectivities require in order to make a claim to 'belong' in Europe."[6] Finally he asserted, Such considerations make the attempt--even the aspiration--to construct a European identity vitally important. To state the opposition rather starkly, the present debate over Europeanness may be seen as crystallizing a wider struggle between secular, civic, and inclusive pluralist conceptions of collective identity and alternative images of community rooted in ethno-historical exclusivism, blood, and religious faith.[7]

Even as (and in part because) the economic and legal integration of Europe has proceeded under such instruments as the Single European Act and the Treaty of Maastricht, some Member States have also seen a rise in expressions of nationalism, regionalism, and other forms of asserting a collective identity.

2.1 Studies on the Issue of European Identity

Issues of cultural, social, and political identity in Europe have surfaced in a variety of forms and have been studied recently in a wide range of disciplines, including law{8}, political science{9}, anthropology[10], religion[11], education [12], media analysis[13], historical studies [14], and even archaeology [15]. In 1994, one European social science journal devoted an entire number to studies on this issue.[16] Schlesinger's article appeared that same year in a number of the American Academy of Arts and Sciences' journal devoted to analysis of European integration and identity. In another essay from that number, Stanley Hoffmann, Chairman of Harvard's Center for European Studies, said pessimistically, Almost thirty years ago, I wrote an essay for this journal about Western Europe which began by calling it prosperous and disunited. I then stated: "Europe today has no clear identity, no profile other than that which a process of industrialization and a process of economic integration have given it. Europe today has no sense of direction and purpose." In 1994, this judgment remains valid....[17]

Not all observers have taken such a negative view of Europe's developing a collective identity. ÿrstrom Møller has looked back to the medieval period, when, "on the basis of a common way of thinking (culture), economics, technology, and trade followed to produce a strong integration.[18]From his perspective, Economics, technology, trade, and culture [as distinct from military force] produce a strong glue for European integration. They pull different nations and different peoples together in a loose network, one that is held together by spirit instead of force, by the will to stay together, and by a realization of shared interest and common background.[19] This optimistic vision has been challenged continually by acute crises such as mad cow disease and chronic problems such as the effort to create a European Monetary Union. Crises of this kind may in the end shatter dramatically the Community's sense of common purpose. In the meantime, that "shared interest" is necessary to keep the Community functioning on a daily basis.

III. The Role of Alcoholic Beverages in constructing a cultural identity.

3.1 The social science perspective

Alcohol is an unusual commodity. It plays many different roles in different social and cultural settings. As Mary Douglas, one of Britain's pre-eminent social scientists, put it, "Drinking is essentially a social act performed in a recognizable social context."[20]

3.1.1 Patterns of Alcohol Consumption Illuminate Social Structure

According to the social science perspective articulated by Mary Douglas, the consumption of alcoholic beverages is not predominantly an act reflecting individual choices or material necesities. "Drinking, more than most other social activities, derives its meaning from its social context and setting."[21]} Some of those social contexts have powerful emotional impact, and the use of alcoholic beverages is characteristic of both the most sacred and most profane social activities. "[T]he ceremonials of drink construct the ideal world."[22]

The manner in which a particular society uses alcohol can reveal much about its most fundamental human values. In the introduction to a collection of sociological studies on behavior related to drinking, the editors asserted that "'alcohol is to social science what dye is to microscopy'.... [A]s a ubiquitous part of everyday life and as a potent medium for symbolism, alcohol can... [highlight] the structures and relations of a society and the processes of stasis and change."[23] Others have stated this view even more strongly. Mary Douglas asserted, "Drinks give the actual structure of social life as surely as if their names were labels affixed upon expected forms of behavior."[24]

3.1.2 Patterns of Alcohol Consumption Illuminate Social and Cultural Values

Social scientists have been emphatic that alcoholic beverage consumption is predominantly a mirror of social and cultural values, not an individual activity. "The essentially social nature of drinking is indicated by the fact that solitary drinking is commonly considered a problematic symptom. The timing, frequency, and, above all, the company of drinkers can tell us a great deal about... shared values."[25] In this view, drinking is an activity with political significance, as well. "To study drinking is also to examine diverse forms of sociability, to listen to the rallying cried for trade unions, socialists, ethnic groups, nationalists, and religious reformers."[26] Social scientists studying Europe have shown, for instance, how bars could play a crucial role in a region's political culture[27] and how the use of government power to regulate alcoholic beverages in favor of certain beverages could lead to political resistance through refusal to drink them.[28]

Maryon McDonald has looked directly at the difference in attitude between the culture of "northern" Europe (in this case, Britain) and "southern" Europe (here, France) with regard to the role of alcohol in daily life. According to McDonald, the Britons, accustomed to grain-based alcoholic beverages, considered them a special commodity, a kind of treat or escape from the burdens of daily life. By contrast, the French, accustomed to primarily grape-based alcohol, considered it very much a part of daily life, literally like food. Britons on holiday in France would be inclined to drink too much because of the unaccustomed availability of alcohol and the lack of constraints on its consumption--behavior that would baffle their French hosts.[29]

3.2 Case Studies of Alcohol Consumption

Social scientists have produced many case studies related to alcohol consumption and its role in constructing social and cultural identity. Some scholars, such as McDonald, have even made a specialty in this area.[30] She has shown a particular interest in Europe; one of her case studies, for instance, looks at drinking behaviors of men in Brittany.[31] Other relatively recent research in what are now Member States include Fishing, Drinking, and the Construction of Identity in Rural Ireland[32] and studies on such diverse groups as yuppies in Finland and pub patrons in England.[33]The English studies reflect the differences that social class and other differences of background would make in choice of alcoholic beverage. The Finnish study showed in painstaking detail how changes in drinking patterns accompanied other changes in social relations and cultural values due to the emergence of an affluent young professional class with cosmopolitan interests. There is nothing surprising about these findings, but in the context of European integration and the impact of the Single Market reforms, it is worth noting Professor Barrows' view of major changes in drinking patterns: The increasing commercialization and industrialization of alcohol production intersected with changing tastes and political decisions in the last two centuries to produce drastic alterations in the choice of beverages.... Since improved production techniques usually diffused quickly, commonalities between national histories of the development of drinking cultures often in part reflect a shared change in the material availability of various drinks.[34]

Under this view, we could expect greater integration to bring more drastic alterations in national and regional patterns of alcoholic beverage consumption. We would also expect integration to bring changes in regulatory schemes, including taxation.

IV.The Role of Alcoholic Beverages in the European Economies

The European Union is still essentially an economic union first and foremost. Thus, whatever its social and cultural significance may be, alcohol's primary role in the Community is economic. Alcoholic beverages constitute a commodity that is produced, distributed, and consumed widely within the Community, whether internally to Member States, as part of intra-Community trade, or as part of a global trade that, for some member states, contributes significantly to economic vitality. In 1991, for instance, alcoholic beverages made up 2.6 percent of total household consumption expenses for the twelve Member States (compared to 16.0 percent for food and 2.0 percent for tobacco). That percentage was highest in Ireland, at 11.5 percent; in Britain, at 6.7 percent; and in Denmark and Greece, at 3.1 percent.[35]

4.1 Alcoholic Beverage Exports

Alcoholic beverages also figure among the Community's leading export commodities, especially for Member States that produce wine and spirits.

4.1.1 Wine and Spirits Exports

In 1992, the last year before the Single Internal Market began to operate in the Community, eight of the world's top ten exporters of alcoholic beverages were Member States, including the top six: France, the United Kingdom (Britain), Italy, Germany, Spain, and the Netherlands, respectively. All but the last earned over $1 billion from these exports. The top two combined to account for close to 50 percent of the world's total: almost 30 percent for France's $6.62 billion and almost 19 percent for Britain's $4.18 billion. Even Ireland, tenth on the list of exporters, earned over $540 million, 2.4 percent of the world total.[36]

France's export market share for 1992 was composed largely of wine (over $4.2 billion) and distilled wine, that is, brandy (over $1.8 billion); it has long been the world's leading exporter in both categories.[37] Similarly, Britain has exercised an overwhelming domination of the world's export market for whisky, with a share of almost 80 percent in 1992 and a dollar total of almost $3.5 billion.[38] Due to these exports of whisky and distilled wine, Britain and France have for years ranked first and second in market share for spirits (distilled alcoholic beverages), at 36.8 percent and 21.6 percent of the 1992 world total, respectively.[39] According to the industry association for European spirits producers, total spirits exports are worth about 3.7 billion ECU, comprising over 62 percent of all Community exports of alcoholic beverages.[40]

4.1.2 Beer Exports

In 1992, the world's five leading beer exporters were also Member States, led by the Netherlands (almost $750 million, close to a 23 percent market share) and Germany ($560 million; 17 percent share).[41]} The smaller total export numbers for beer do not reflect a smaller overall market; in 1993, beer production in the Community was estimated at 1.14 billion hectoliters.[42] Beer is produced and consumed locally in more states than any of the other alcoholic beverages. It is precisely because of this extensive local production that the export market is smaller. While few states have the ability to produce whisky or brandy that will appeal to consumers in other states, many can produce beer that local consumers will drink. Moreover, beer does not travel well and is generally uneconomical to transport long distances because it is relatively heavy and of low value.

4.1.3 Total Exports

In general, the Member States have dominated all categories of alcoholic beverage exports. In 1992, the Member States included seven of the top ten in wine[43]}, five of the top ten in whisky[44], seven of the top ten in distilled wine (brandy)[45], and seven of the top ten in beer[46]. However, their consumption has also been considerable, and much of their export totals reflect transshipment. Thus, in that same year, Member States also figured heavily in the import market, with seven of the top ten overall importers of alcoholic beverages. Germany ranked second overall (to the United States), with a total of almost $2.7 billion; it was followed closely by Britain, at almost $2.6 billion.[47] Wine was the single largest category of import for both states.

Exports of alcoholic beverages constitute a small but measurable fraction of Member States' total exports. In 1992, the highest percentages, not surprisingly, belonged to France (2.7%)[48]and Britain (2.2%) [49]; Ireland (1.9%)[50] and Spain (1.6%)[51]were the only other Member States with an alcohol export component substantially above one percent of total exports. To put these figures in the perspective of each state's total economy, Ireland's exports in 1992 amounted to a remarkable 56 percent of GDP (highest in the Community, along with Belgium), while Spain's exports (the lowest proportion in the Community) amounted to less than twelve percent of GDP. For Britain and France, the percentages were almost eighteen and almost nineteen, respectively.[52] Of course, these trade figures do not reflect the substantial internal market for alcoholic beverages within each Member State.[53]

Altogether, these figures show that the production and sale of alcoholic beverages play a significant role in the European economy, even driving the economies of some regions. This significance is not a new phenomenon; archaeological evidence has shown that alcoholic beverages played a key role in the economy and society of France as long ago as the Early Iron Age.[54]

4.2 Alcohol as Agriculture in the Community

In the European Community, alcohol is classified as an agricultural product[55]}, with wine the paradigmatic case. Agriculture in general has held a privileged place in European social and economic policy.[56] Since a substantial proportion of the production of alcohol (particularly spirits and beer) is more industrial than agricultural, this approach leads to some peculiar results.

4.2.1 The Common Agricultural Policy

At the heart of the Community's treatment of agriculture lies the Common Agricultural Policy (CAP), a dense and complex set of interlocking and overlapping rules designed to encourage self-sufficiency in key agricultural products.[57] It is also designed so as to encourage the survival of small family farms and their associated rural way of life. Although the agricultural population of Europe is relatively limited (6.5 percent) and contributes only a small percentage (1.4) to the European economy, it wields a disproportionate amount of political influence. That influence is clearly a function more of traditional social policies than of any deliberate economic plan.

The treaty itself mandates that one of the three central factors of which the CAP must take account is that agricultural activity results from the social structure of agriculture.[58] } The CAP is intended to regulate agricultural production in the Member States in an even-handed manner. However, geographical variation between regions creates natural inequities of production for which the CAP could never compensate. As a result, the CAP naturally favors the interests of some regions over others.

4.2.2 Wine as an Agricultural Commodity

The Community accounts for more wine production and consumption than any other state or economic unit in the world. [59] Of the four largest Member States, only Britain has no significant wine production, while France and Italy lead the world's wine exporting states--followed by Spain, Germany, and Portugal.[60]} Throughout the southern half of the Community, wine is generally treated as a food commodity and plays a routine and important role in daily life. According to the wine trade's own representatives, Europe's 2.2 million vineyards occupy 3.5 million hectares of land, generate 200,000 directly dependent jobs, and produce an annual turnover of 35 billion ECU.[61]

It is not surprising that wine figures among the commodities tracked closely under the CAP. It has been subject to the same institutional supports as other such commodities, including encouragement of production and consumption.[62] To the extent that wine plays a significant part in the agricultural economy of Europe's southern half, those supports are understandable and arguably appropriate. However, since the northern states cannot grow significant quantities of wine, and must of necessity run a net "deficit" of consumption over production, the CAP exacerbates a situation of natural imbalance. (See Table 1.)

Usable Wine Production[63]


(L. per cap./yr.)


Total Consumption[67]














































































127,800[69] The "Wine Lake"

The Community's policy of supporting production in certain basic commodities has sometimes generated large surpluses in those commodities. The growth and continued existence of a "wine lake" reflected an excess of production over consumption, due in part to a slow but steady decline in wine consumption in Europe and throughout the world from the mid-1970s to the early 1990s.[70] At the same time, improvements in agricultural methods has led to higher yields in many wine-growing regions, and it has been difficult to control production adequately.[71] Moreover, wine is one of the agricultural products for which the Community tracks "self-sufficiency", that is, an excess of production over consumption.[72] Consequently, the existence of the wine lake provided a justification for encouraging consumption of wine.[73] Recently, however, the wine lake has virtually dried up[74], and the Community no longer finds it necessary to encourage consumption in order to maintain the appropriate balance with production.

4.2.3 Other Agricultural Products Used in Alcoholic Beverages

Although wine is the only commodity included under the CAP that is in itself an alcoholic beverage, other European agricultural products also figure in the alcoholic beverage industry. Among them, hops is the only one used virtually exclusively for alcohol-related purposes, specifically as an ingredient in brewing beer. In seven Member States, farmers grow hops as a commercial crop; however, 80 percent of the total amount grows in Germany alone.[75] Thus the aid contributed by the Community to hops growers (in the form of price supports and special payments to assist some growers' transitions to more marketable varieties of hops)[76] benefit Germany far more than any other Member State.

The largest product group of the Community agricultural sector, cereals, include a component used for alcoholic beverages. In fact, the distinction within the Community between grape-based and grain-based alcoholic beverages has been a cause cÈlebre in both law and social science.

V. Factors in the Taxation of Alcohol

Because alcoholic beverages play such a significant role in social and economic life, the taxation of alcohol--or its regulation in any form--is inevitably a complex matter, taking into account many vocal constituencies. The higher the level of government involved, the more constituencies will demand to be heard. At the level of the Community, the chorus is large and discordant.

5.1 Viewpoints and Voices

5.1.1 Producers

Of all the voices clamoring to be heard in the decision-making process for the taxation of alcohol, those of producers have the most straightforward economic interest. From their viewpoint, continued production, distribution, and consumption of alcohol and alcoholic beverages at a constant or increasing level is a necessity for economic survival. Alcoholic beverages are generally a discretionary item for most consumers, and thus an item with significant price elasticity.[77] Basic economic theory would suggest that higher taxes--and consequently prices--would discourage purchase and consumption, thus injuring the economic interests of the producers.[78] Agricultural Producers

In general, Europe has not developed the giant mechanized operations that dominate the agricultural sector in the United States. Consequently, most agricultural producers are still small or family farmers. Even in viticulture, the majority of acreage is in the hands of relatively small producers. All of these farmers, along with their families and laborers, and the suppliers of personal and agricultural goods that the farmers consume, rely on the continued economic vitality of agricultural sector for their own material well-being. In Europe, the farmers whose crops are most directly linked to the alcoholic beverage industry are those who grow wine, although considerable quantities of grain and other fruit are produced for use in other alcoholic beverages. The European wine growers have their own trade association[79], as well as other formal and informal links to one another.[80] All agricultural producers whose product is used in the creation of alcoholic beverages have economic reasons to prefer that the taxation of alcohol be minimized on the beverages in which their products are used. Industrial Producers: Brewers and Distillers

Unlike wine, most beer and spirits come to the commercial market from producers who take raw agricultural material from farmers and process it through various means to manufacture alcoholic beverages in bulk. In Europe, most wine is processed from raw material into finished product at or near the site of the vines that contribute that raw material. Thus, its production generally occurs on a relatively small scale. Unlike the agricultural producers, whose methods may still echo centuries of local farming, most brewing and distilling operations utilize modern manufacturing processes.[81]

Notwithstanding these differences, the beer and spirits industries share wine-producers' attitudes towards taxation: they would prefer their products to bear as little of it as possible. In Europe, these industries have a further concern with regard to excise rate differentials between different categories of alcoholic beverages, as well as between different Member States. These tax rate differentials can create distortions in the Single Market and favor certain products, states, and regions over others. Of course, those whose products fall into favored categories are generally happy to preserve the preferential rate structure. Many producers would also prefer to protect their traditional markets against competition by other products, especially those from outside the local area that might disrupt traditional consumption patterns.

5.1.2 Consumers, Importers, and Retailers

Like producers of alcoholic beverages, consumers, importers, and retail vendors of these products prefer lower taxes, assuming that it will keep prices lower.[82] However, the interests of these groups differ in many cases than producers', because they have no necessary connection with production conditions or the local and regional cultures that might be associated with those conditions. Consumers, importers and retailers may want to support the continued production of their favorite products, but in general they have little interest in protectionist measures to preserve particular industries or cultures. Consumers

Consumers do not generally organize into groups raising strong and unified voices in the political arena. Nonetheless, they have opinions that can be measured by opinion polls and cast the ballots that elect the politicians who make social and economic policy. Steep rises in any taxes are rarely popular with consumers. Importers and Retail Vendors

Like producers of alcoholic beverages, importers and retail vendors seek to sell as much of the product as possible. They dislike the imposition of taxes that may either reduce sales (if prices are raised) or cut into profits (if the taxes are absorbed by producers and retailers). However, the economic interests of importers and retailers generally diverge from those of producers where protectionism is concerned. For importers, by definition, good business requires consumption of drinks that are not indigenous to the local culture. Thus, importers have strong reasons to oppose taxes that discriminate against beverages from other states. Retailers have less reason to take a strong stand on the issue, since their inventory will probably include a mix of domestic and imported beverages. Nonetheless, discrminatory taxes and other protectionist measures may reduce their sales of imported goods that could otherwise find an active local market and provide further profits.

5.1.3 Temperance (Moral) Advocates

At the other end of the political spectrum on the subject of alcohol taxation is the interest represented by temperance advocates. Since that interest is moral and not economic, the level of taxation tends to be of less interest to them than the strict regulation, or total prohibition, of consumption opportunities. Temperance advocates have a strong voice in some parts of Europe, especially in the northern Member States, but they have little direct influence in setting tax policy. However, it is probably not coincidental that Ireland, the Member State with the highest percentage of its revenue derived from alcohol excise taxation, is also the Member State with the highest percentage of teetotallers in its population.[83]

5.1.4 Anti-Abuse Advocates: Public Health and Public Order

The most powerful voices for regulation of alcoholic beverage consumption have been those of anti-abuse advocates, lobbying on public health and order issues. These advocates tend to favor application of high taxes on alcoholic beverages, for one or both of two broad policy reasons:

  1. higher taxes may discourage consumption[84], and
  2. higher taxes may raise enough revenue to pay for the costs of alcohol-related problems, including traffic incidents, physical violence and other criminal acts, lost productivity at work, treatment for alcoholism and related physical or mental disorders, and so forth.[85]

Such problems of public health and order are seen as particularly troublesome in the northern Member States, but these concerns are not confined to any one geographical area; they are shared throughout Europe and the world. In 1980, the World Health Organization Alcohol Action Plan invited states to sign a pledge to reduce alcohol consumption within their borders by 25 percent by the year 2000. All Community Member States signed that pledge but have now relaxed the goal to achieve a 25 percent reaction at some unspecified future time.[86]

5.1.5 Sub-National or Transnational Regions

As the comments above on both social identity and the European economies suggest, the peoples of many regions within Europe feel a close association between their respective ways of life and the production or consumption of particular alcoholic beverages. As producers and consumers, the people of these regions and ethnic groups tend to favor lower taxes on these favored products, to encourage consumption by themselves and others. In wine-producing areas, a strong market for wine consumption may seem crucial to economic survival. Similarly, parts of Scotland and France derive much of their income from whisky and cognac sales to a wider market.

Just as the people of these regions prefer lower taxes on the products that they consume and produce, they tend to favor higher taxes on products from elsewhere that might compete effectively with them, especially within the producing region itself. Indeed, neutralizing such competition can seem to be a matter of survival for the local culture, in terms both of its social drinking patterns of drinking and its underlying economic well-being. Thus, it is easy for a strong economic protectionist sentiment to arise in these regions, raising the banner of cultural preservation.

5.1.6 National Governments

National governments hear all of their constituents' voices and must weigh their competing interests and concerns. In every Member State, the preceding five viewpoints are represented; in each state, some of those viewpoints carry more weight than others. Where production of alcoholic beverages plays a significant role in a state's economy, the voice of producers and their regions may be dominant. In states where alcohol consumption generates serious threats to public health and order, advocates for regulation may exert more influence. In states where both circumstances obtain, the government's balancing act may be more difficult. A Case Study: Britain

Britain provides an excellent example of this tension between considerations of economic well-being and public health, among other factors. Rob Baggott has explored the interaction between alcohol, politics, and social policy in the 1970s and 1980s.[87] As we have seen, Britain figures among the world leaders in both imports and exports of alcoholic beverages, which provide a substantial revenue base. Taxes on alcohol in general raised over six billion pounds sterling (over $9 billion) in 1987 alone.[88]} The Scotch whisky industry accounted for the largest share of that total, making it a significant commodity for Britain altogether and a vital part of the economy in Scotland, employing some 20,000 workers in one of Britain's most vulnerable regions.[89]

Thus, considerable pressure could be brought to bear on the national government to ease the taxation of alcoholic beverages generally and whisky in particular. A powerful lobby opposed higher alcohol taxes, based on arguments about likely ineffectiveness in achieving the purpose and negative economic impact as a harmful side-effect. Industry groups and consumers led this opposition, backed by government departments such as Trade and Industry (DTI) or Agriculture, Fisheries, and Forests (MAFF), whose brief was to increase economic opportunities first and foremost.[90]

On the other hand, Britain--like all of the northern Member States--has had significant alcohol abuse problems that generate high collateral costs and furnish a strong rationale for high levels of taxation. In the late 1970s, three Parliamentary committees concluded that the government should use taxation to limit alcohol consumption. As one committee put it, alcohol excise taxes "are the single most important instrument the government has for influencing alcohol consumption." [91] These recommendations were echoed in ensuing years by reports from organizations of medical professionals, and of course reinforced by groups of temperance advocates and anti-alcohol abuse volunteer groups. This entire "alcohol misuse lobby" was fully supported by the government Department of Health and Social Services (DHSS), which actively urged the Treasury to maintain alcohol prices in real terms.[92]

In the end, it was the Treasury Department itself that most strongly rejected the explicit use of excise taxation for purposes of public health policy. One government official stated in 1978 that "'decisions on the taxation of alcoholic drinks depend on a variety of factors including revenue needs, effect on prices and the general economic situation,'" although later pronouncements suggested that "'health factors are among those taken into account.'"[93] Most decisions on alcohol taxation were made on the basis of determinations from inside the government, specifically the Departments of Treasury and of Customs and Excise. The competing constitutencies represented by DHSS and DTI would essentially neutralize one another. As one fiscal official explained, "'The pressure groups for individual industries such as drinks... would always be received politely but mainly ignored. We would either be convinced by the facts provided by our officials, or not as the case may be, but we were unable to be convinced by an obviously biased group lobbying in their own interest.'"[94]

The one major exception to this generally unreceptive government attitude has been the treatment of the Scotch whisky industry. An ongoing campaign by industry groups, MAFF, DTI, and Scottish Members of Parliament, has argued against raising the level of excise tax on whisky, pointing to the very high level of existing tax, the potential ill effects on the fragile Scottish economy, and Britain's need to encourage export commodities. In the background has lurked a concern for the political ramifications of overtaxing whisky in an era of strong Scottish nationalist feeling. "In this context the Scotch Whisky industry is a highly sensitive issue. The Industry's history is bound up with Scottish tradition and national pride." [95]

5.1.7 European Community

At the Community level, the different voices on alcohol taxation strive to make themselves heard in a variety of fora, some directly and others indirectly, but it is the institutional interests of the Community itself, as represented by the Commission, that tend to drive the agenda. European Commission

Although the Commissioners are chosen such that each Member State is represented, the Commission as a whole constitutes the Community's organ of unification and integration. It seeks to bring together all of the Community's disparate interests within an even-handed and mutually acceptable framework. In effect, it is the Commission that speaks for "Europe". Where the excise taxation of alcohol is concerned, the Commission has sought to carry out the mandates of Community treaties with respect to the free movement of goods in what is now a Single Market. In general, it is the Commission that is responsible to monitor the behavior of Member States and their compliance with those mandates.[96]

In particular, is the Commission that has brought before the European Court of Justice most of the major cases alleging discriminatory treatment by a Member State through excise taxation of alcohol. [97] It is also the Commission that has originated the proposals for legislation to apply approximated rates to a harmonized tax base.[98] Finally, it is the Commission that must continue to provide a forum in which the various interested parties (e.g., Member States, elements of the alcoholic beverage industry, and public health advocates) can formally articulate their viewpoints on the issue with regard to future evolution of Community policy in this area. European Parliament

As an elective body representing geographically defined districts, the Parliament provides a forum for not only those interests that dominate each state's national priorities, but also minority interests that may carry significant influence or concern in particular districts. Moreover, the Parliament provides a forum in which transnational interests can coalesce to articulate their positions and apply political pressure. These transnational interests include political alignments that form blocs within the institution. They also include groups with regional concerns that are common to more than one Member State (e.g., agriculture in the southern Member States) and with public policy issues that transcend national borders (e.g., public health), as well as the usual lobbying groups for particular industries (e.g., wine growers or other elements of the alcoholic beverage industry).

Parliamentary committees review proposed legislation and make recommendations to the Parliament as a whole with regard to acceptance, rejection, or possible revision. These committees provide an ideal platform for interest groups whose key issues fall under a particular committee's purview. Because the Treaty of European Union has mandated a role of increasing participation by Parliament in the development of significant Community legislation, Parliament's role as a forum for such interests is likely to continue growing. However, the excise taxation of alcohol falls under the general category of fiscal matters, on which the Parliament's role is only consultative, with no capacity to determine, or even block, final legislation. [99] Thus, the Parliament's role in this area is likely to remain relatively marginal. Economic and Social Committee

The Economic and Social Committee has no substantive power to legislate, either to initiate legislation or to give it final form. However, the Committee must be consulted on matters within its competence (e.g., under Article 100A), and it may issue advisory opinions on its own initiative. ECOSOC was designed to give formal representation to various economic and social interests within the Community. Appointed by the Council of Ministers as individuals (i.e., not representing a specific political bloc), Committee members essentially represent three groups:

  1. employers,
  2. workers, and
  3. others, including agricultural interests and consumers. [100] European Council of Ministers

Member States establish their respective national policies and priorities internally, after weighing the competing interests. In the Council, responsible ministers from the states can work to protect and promote those policies and priorities. The Council has the last word on Community legislation, especially in areas such as taxation (fiscal matters) for which the Parliament's competence is limited to non-binding recommendations. Thus, whatever principles the Commission may embody in its proposals, and whatever recommendations the Parliament may make for revising them, it is negotiations in the Council that will determine the final terms of the legislation. Those negotiations are not subject to any outside scrutiny, so the reasoning behind the terms can in many cases only be inferred.

5.2 Purposes of Alcohol Excise Taxation

In general, the primary purpose of taxation is to raise revenue for the government applying the tax. The excise taxation of alcohol is no exception; it is first and foremost a revenue source. However, as alcohol is a commodity with many social and cultural ramifications, its regulation through taxation can serve a variety of wider policy objectives. [101]

5.2.1 Alcohol Excise Tax as a Revenue Source

Excise taxation is the oldest form of regular institutional revenue source; until the twentieth century, it provided the bulk of government revenues for many states.[102] The excise taxes or duties that a state may apply on various forms of alcoholic beverages can be a significant source of revenue if the tax base is broad enough and the rates are sufficiently high. Indeed, excise taxation of alcohol constituted one of the largest sources of revenue for the British government in the nineteenth century, over 40 percent of total government income.[103] Appeal of Alcohol Excise Tax as a Revenue Source

Excise taxes in general have a practical appeal to governments. These indirect levies can be applied to specific target commodities with great flexibility. The tax base and rates can be selected according to the government's priorities; rates in particular can be changed from year to year in response to current revenue requirements, policy shifts, and public opinion. Of the three commodities most widely subject to excise taxes, alcohol generally brings in more revenue than tobacco products but less than mineral oils.[104] In 1992, the last year before frontier controls were removed under the Single Market, the percentage of total excise taxes derived from alcohol ranged from as low as 2 percent (Italy) to as high as 27 percent (Ireland), with a median of about 8.5 percent.[105]

Excise taxation of alcohol appeals to governments also because it is politically acceptable. Although public views on the appropriate rates and tax base may vary from state to state, and year to year, the idea of subjecting alcohol to excise taxation has rarely been controversial. Such acceptability is unusual; there are few commodities that can be taxed without raising storms of protest. Governments are unlikely to give up easily the authority to impose a tax that is both flexible in its application and acceptable to the public. Revenue Contribution to the Various Member States

The revenue contribution made by alcohol excise taxation to Community Member States varies considerably from state to state. In 1992, the largest absolute amount of revenue raised by a Member State from alcohol excise taxes went to Germany: more than 8.25 billion deutschmarks (about $5 billion), followed closely by Britain at more than 3.15 billion pounds sterling (about $4.5 billion).[106] Most Member States raised less than a billion dollars, but still a substantial amount.

Germany's alcohol revenues, although large in absolute terms, constituted less than one percent of the state's total income that year. The state with the largest percentage contribution from alcohol taxes was Ireland, at a full four percent of total revenues. At the other extreme, Italy and Greece derived no more than three-tenths of one percent of total income from excise taxes on alcohol. The only other states that received more than one percent of revenues from that source were Denmark, Luxembourg, and Britain; of those, only the last received as much as 1.5 percent.

Nevertheless, none of the Member States would be happy to give up the alcohol excise component of its revenue stream. On the contrary, some Member States are likely to draw increasingly on this source, as they shift the revenue emphasis from direct (e.g., income and wealth) taxes to indirect taxes, especially VAT and excises.[107] Indirect taxes have a variety of advantages to a government that seeks to raise revenue without running the political risks of raising direct (i.e., income) taxes. Indirect taxes have less negative impact on employment, which is important in a Community facing chronic underemployment. Indirect taxes can be hidden in the prices of goods, and the rates and tax base (i.e., products covered) can be adjusted more easily and frequently to reflect fiscal needs or other policy objectives. Furthermore, Member States can always blame the Community for changes to indirect taxes, since those taxes have been harmonized, ats least formally. In general, so long as revenue needs continue to dominate tax policy formulation, excise taxes on alcohol will continue to hold great appeal.

5.2.2 Other Policy Purposes

Excise taxes in general are appealing to governments not only for as revenue sources but also as convenient mechanisms for promoting other policy purposes. The three most heavily excised commodities--alcohol, tobacco, and mineral oils--all raise significant social policy issues. [108] Adjusting excise taxation on any of these commodities can serve to discourage consumption, preference one form or application of the product over another, and pay the costs of externalities associated with the use of that commodity. Excise taxation (like any tax system broadly applied) can also serve a control function, allowing the government to track more easily the production, distribution, and consumption of targeted commodities. Regulation of Consumption

In the case of alcohol, the regulation of consumption is still a controversial issue. All Member States have signed onto a World Health Organization commitment to reduce consumption of alcohol by 25 percent between 1980 and the year 2000.[109] However, it is not clear that all of them are fully committed to this goal, or that any of them could achieve it if they so desired. The wine-growing Member States tend still to see wine consumption as vital to the economic well-being of their respective agricultural sectors. Moreover, they consider wine to be part of their routine food supply. Red wine producers have pointed proudly to recent research suggesting that moderate quantities of wine can help reduce the risk of heart disease.[110]

Even where governments seek to change consumption patterns, they cannot easily legislate behavior through taxation alone. It is beyond question that high levels of alcohol consumption have a substantial, negative impact on economic productivity, public order, health costs, family stability, and other important social factors, but there is considerable debate as to what responses might be most effective. Those Member States in which high levels of alcohol consumption are a chronic problem employ a variety of mechanisms to regulate consumption, including high levels of taxation. These mechanisms have not solved the problem, and it is not clear that raising the price of alcoholic beverages is necessarily the "ultimate disincentive" that some have thought it to be.[111] However, the northern Member States continue to feel that taxation is a useful tool for discouraging alcohol consumption. [112]

5.2.3 Monitoring Production, Distribution, and Consumption

An additional benefit that a government can derive from the excise taxation of alcohol is the use of excise documentation to monitor production, distribution, and consumption of alcoholic beverages. The French Model France, one of the world's premier wine-growing states, set the excise tax on still wine at a minimal level.[113] The tax had little economic impact, either as a revenue source or a price disincentive, but it allowed the French government to monitor the movement of wine whose value on the commercial market is largely a function of its controlled origin. The government could thus help to ensure that wines sold under the name of a particular region or locality are genuine, maintaining the reputation of the producers and the value of their export earnings. The excise system also enabled the government to monitor patterns of, and fluctuations in, the production, distribution, and consumption of what may be France's most important--and sensitive--agricultural product. Monitoring at the Community Level

The French system of excise taxation has furnished a model for Community-wide monitoring of alcoholic beverage transactions. However low the rate may be for a particular category of beverage, all types are included in the excise system and can thus be tracked more readily. This monitoring capacity can be very useful to the Community, which needs adequate statistics in order to implement such key policies such as the free movement of goods and the Common Agricultural Policy. It also aids in maintaining product quality standards.[1124

5.3 Structure of Alcohol Excise Tax

Excise tax can be imposed on alcohol in a variety of ways. The tax structure can vary among the types of alcoholic beverages and the possible bases for taxation of each type. The point of taxation can also vary. These options exemplify the flexibility that makes excise taxation appealing to governments. Indeed, the various Member States employed a wide range of options before the harmonization directive narrowed them down somewhat. [115]

5.3.1 Types of Beverages

Alcoholic beverages can be classified in a number of different ways, based on such factors as alcohol content, method of production, agricultural product basis, and so forth. The Council directive on harmonization of alcohol excise rates[116] uses a fourfold system of classification: wine, beer, "intermediate products," and spirits. This scheme reflects the categories that states have used traditionally.[117]

Grape-based wine is the only alcoholic beverage that is also per se an agricultural product, produced purely by natural fermentation. However, it does come to market in a variety of forms that have affected classificatory schemes, such as still versus sparkling wines and naturally fermented versus fortified wines. Grain-based beer is more complex to produce than wine, but easier to classify, as its various forms are generally considered more closely akin than some of the variations in wine. However, some beers are also fortified with alcohol beyond the fermentation process; they may fall under the "intermediate" category with fortified wines.

5.3.2 Bases for Alcohol Excise Taxation

Unlike sales or value-added taxes, excise taxes or duties are not usually imposed ad valorem. Most excises on alcohol have been imposed according to one of three other criteria: volume, alcohol content, or specific gravity, sometimes in combination. Among the Member States before the harmonizing directive took effect in 1993, only France applied excise tax solely to a single factor (volume) for all types of alcoholic beverages. [118] Price

Although price has not traditionally been the factor to which alcohol excise taxes have been applied, it was used in some Member States before the harmonizing directives took effect.[119] Moreover, an ad valorem excise has been suggested as one method of maintaining alcoholic beverage prices at least at the level of inflation.[120] Volume

Volume is perhaps the simplest factor to which an alcohol excise tax can be applied. Among the Member States, it has also been the factor most most consistently used among Member States for taxing wine. It has also been used widely for spirits, often in combination with alcohol content. [121] Taxing volume has the advantage of administrability, as volume is simple to measure at any stage of the process of manufacturing and distributing alcoholic beverages. Alcohol Content

Alcohol content is the factor favored by public health advocates for application of excise taxes on alcoholic beverages, because it most directly reflects the feature of those beverages that is considered to have deleterious social and economic effects.[122] Member States have used this measure fairly widely, either alone (for spirits[123] or in combination with measures of volume to create several "rate-bands" within a given category of alcoholic beverage.[124] Specific gravity

Specific gravity is a measure used only in taxing beer, and more particularly the wort that is the "active" element of beer and undergoes the fermenting process when yeast is added to it. Specific gravity is measured in degrees, and the excise tax has usually been applied to the difference in degrees between the specific gravity (i.e., density) of the wort and that of pure water, generally in combination with a measure of volume. [125]

5.3.3 Point of Taxation

Excise taxes or duties are taxes on products for consumption, but they are not necessarily calibrated to the act of consumption, or even to the act of purchase as a surrogate. Some Member States have imposed alcohol excise taxes at the point of "consumption"[126], but such taxes are traditionally imposed at an earlier stage, which may be at any point from the declaration of intent to manufacture [127] }, to manufacture (or importation itself)[128] , or most commonly when the products leave the manufacturer or a bonded warehouse and become available for consumption. [129]

VI. Other Forms of Regulation on Alcohol Production and Consumption

Excise taxation is by no means the only form of government regulation applied to alcohol production and consumption. In the Member States, other forms of regulation have included state monopolies on production, distribution, and retail sale; constraints on private sector retail outlets; standards for specific categories of alcoholic beverage; and other forms of taxation, especially value added tax (VAT).

6.1 State Monopolies

One traditional mechanism of government control over alcoholic beverages has been state monopolies. Such monopolies may extend to production of the beverages, distribution of those products, and retail sale to consumers. In the Community, some member states have exercised such monopolies for one or more categories of beverage. For example, before harmonization in 1993, Germany handled the marketing of spirits through a state monopoly.[130] Before Sweden acceded to the Treaty in 1995, its government exercised very close control over all stages of the process through five different state monopolies.[131]

6.2 Retail Outlet Restrictions

States have traditionally regulated retail sales outlets for products of all types. Because of its potential for causing or exacerbating problems of public order, alcohol has always been subject to more restrictive regulation than most products. One restriction, applied very widely, limits the hours of alcohol beverage sales, whether on the premises or in containers for consumption elsewhere. Another restriction applied by many states limits the authority of retailers to sell alcoholic beverages through licensing procedures and fees.[132]

6.3 The Value Added Tax

The one type of taxation that has been most thoroughly harmonized to date within the Community is the VAT. The rates and base for this tax may vary among the Member States, but the principles underlying its application are now converging across the Community, and Member States now rarely operate outside the parameters of the harmonizing directives. [133] The VAT applies everywhere to alcoholic beverages. In fact, this consumption tax is even applied to the excise tax on alcoholic beverages, meaning that every percentage point of excise tax imposed by Member States provides an additional fractional benefit at the applicable VAT rate. The standard VAT rates in Member States range from 15 percent (Germany, Luxembourg, Spain) to 25 percent (Denmark). However, some Member States impose a different rate or regime on alcoholic beverages. [134]

6.4 State Standards

One of the mechanisms that states have often used to regulate alcoholic beverages is the setting of standards for a beverage to qualify under particular product category. Such standards might affect alcohol content (requiring a certain maximum or minimum level), raw materials (requiring that specific ingredients be used), production process, and so forth. Germany has traiditonally been zealous in imposing and enforcing such standards, most visibly with its famous Reinheitsgebot, a centuries-old law regulating beer production.

6.4.1 The Cassis de Dijon Case

State standards regulating alcoholic beverages tend to be inherently discriminatory against imported beverages that have not been produced under the same standards. Although a state may legitimately claim to be using these regulations to protect its consumers from shoddy, adulterated, or diluted versions of a particular type of beverage, the effect of the standards has often been to exclude from the market all foreign products that use the same name for that type of beverage but are produced differently than the regulations require.

Within the Community, regulations of this kind have been problematic as obstacles to the development of a single internal market. In the Cassis de Dijon case [135] , the European Court of Justice established clearly the principle that a Member State could not use regulations establishing standards for a particular type of alcoholic beverage to exclude competing products entering from other Member States. In this case, the competing import from France had failed to meet the German minimum standard for alcohol content in a cassis, or black currant liqueur. As a consequence, Germany had prohibited import of Cassis de Dijon, claiming that its presence on the market would mislead consumers who expected products to adhere to the stringent German standards. The Court did not invalidate the national standard but declared in no uncertain terms that the German requirement "constitutes an obstacle to trade which is incompatible with... the Treaty. There is therefore no valid reason why, provided that they have been lawfully produced and marketed in one of the member States, alcoholic beverages should not be introduced into any other Member State."[136]

VII. The European Court of Justice Jurisprudence on Alcohol Taxation

As the European Common Market has evolved into the European Union, much of the crucial work in establishing a single internal market has been accomplished by the European Court of Justice, applying the fundamental Treaties and secondary legislation to specific cases. [137] In the context of Europe, where national and regional interests have been deeply entrenched--and often in competition or conflict--for centuries, most states have been unable to embrace and implement unreservedly the concept of a regime in which all products, domestic or imported, are treated even-handedly in the marketplace.

Alcoholic beverages have figured in much of the European Court of Justice jurisprudence on discriminatory treatment against imports, as in Cassis de Dijon. One key battleground for this jurisprudence has been the area of discriminatory taxation, prohibited by Article 95 of the Treaty. In this area, the taxation of alcohol has been central, producing some of the Court's most significant decisions for the development of a single market.

7.1 Article 95 and Discriminatory Taxation

Article 95 is brief. Its two substantive clauses state, No Member State shall impose, directly or indirectly, on the products of other Member States any internal taxation of any kind in excess of that imposed directly or indirectly on similar domestic products.

Furthermore, no Member State shall impose on the products of other Member States any internal taxation of such a nature as to afford indirect protection to other products.[138]

This provision articulates a policy common to all international trade treaties. In the words of the Court, it seeks to ensure... that an importing Member State does not, by means of internal taxation of imported products and similar domestic products, give domestic traders preferential treatment as compared with their competitors from other Member States who sell similar products in the market of that State. [139]

As the global economy becomes increasingly integrated, this issue takes on even greater significance, because the jealously-guarded fiscal autonomy of states accords poorly with the principle of free markets and open borders. [140] Customs duties, tariffs, and other border control measures are the most obvious barriers to cross-border trade, but they are not always the most significant economically. Regulatory measures, including tax laws, that apply across the board internally to a state may have an even more devastating impact on imported products. An internal tax may appear on its face to be neutral as between imported and domestic versions of the same product, but because the taxing state produces little or none of that product (as described in the law), it is effectively favoring domestic products that compete economically in the same general market.

The two clauses of Article 95 address this problem in two different ways. The focus in Article 95(1) is on direct competition, prohibiting discriminatory taxation against imported products that compete directly with "similar" domestic products. That approach is standard in trade treaties. Article 95(2) is unusual in extending the prohibition to taxes that discriminate against products competing indirectly for the same general market. Article 95(1) is more precise and easier to apply, and for a private actor bringing an action, Article 95(1) has the advantage of placing the burden of proof on the Member State. Many of the Article 95 cases have been brought by importers or exporters who sought to challenge national legislation that put them at a competitive disadvantage.

Over time, the Court's standard for evaluating discriminatory tax cases evolved from situations in which it sought formal indicia of similarity under Article 95(1) to those in which it considered the situation of "hypothetical identical domestic products," to see if they would have been taxed less than the imported products at issue. Even that test was not definitive, and the Court has in some ambiguous situations (including alcohol taxation cases) the fallen back on the test in Article 95(2) for products that stand in a competitive relationship to one another. [141]

7.2 The Alcoholic Beverage Cases and Their Progeny

While all forms taxation may affect economic behavior, excise taxes tend to have a distortive effect by their very nature, as they are imposed only on selected products. Given the complex motives driving the imposition of excise taxes on alcoholic beverages in particular, it is not surprising that such taxes became the focus of legal controversy in the Community as economic integration deepened and broadened in the 1970s. [142] Moreover, taxes make up a large part of the prices of some alcoholic beverages, especially in the northern Member States; reducing those taxes could potentially have a significant impact on the market. The total number of Article 95 cases decided by the Court is now over 125. Of those, roughly 25 percent have involved alcoholic beverage taxation.[143]

The issue of discriminatory taxes on alcoholic beverages came to a head in what are known collectively as the Alcoholic Beverage Cases. The four individual cases were brought by the Commission against Denmark, France, Italy, and Britain, respectively. The principles of nondiscriminatory treatment established in these cases have been tested in several later cases, most of which followed them clearly. However, a few cases showed different priorities that, as we shall see, are also echoed in the Community legislation harmonizing alcohol excise taxes.

7.2.1 The Whisky and Cognac Case [144] The paradigmatic case on alcoholic beverage taxation is that which the Commission brought against France for taxing whisky and other grain-based beverages more highly than cognac and grape-based beverages. France subjected all spirits to a "purchase tax" correlated to alcohol content; that tax operated similarly on both whisky and cognac. However, France differentiated between the two categories in applying a further "manufacturing tax" to grain-based aperitifs and other beverages but not grape-based "digestives".[145]

Because France was the world's leading distilled wine (cognac) producer, it had a lot at stake in this case. The Court's holding could shape the competition within the Community (the world's largest import market for alcoholic beverages) between France's product and whisky, of which Britain was the world's largest producer. Moreover (recalling Maryon McDonald's discussion of differences between French and British views on alcohol consumption), this case could also shape the legal relationship within the Community between cultural diversity and economic competition.

The French defense in the case rested on two arguments:

  1. that cognac and whisky were not "similar" (thus Article 95(1) was not breached); and (2) that cognac and
  2. whisky did not compete for the same market (thus Article 95(2) was not breached).

The first argument pointed to technicalities of law and of alcoholic beverage production. Essentially, France argued that cognac and whisky were classified under different categories in the common customs tariff codes, and that the Treaty did not specify any contrary classification.[146] They argued also that grain-based whisky and grape-based cognac were made of different materials and were manufactured by different processes, resulting in products that tasted distinctly different.[147]

The second argument was essentially a cultural appeal regarding the different uses of cognac and whisky in French daily life. According to France, whisky was an "aperitif", to be drunk before dinner, while cognac was a "digestive", to be drunk after dinner. Thus, the two products were not in competition and were not fungible; a higher tax on whisky, the French claimed, could never drive consumers who sought an aperitif to purchase and consume cognac as a cheaper alternative. [148] Moreover, the French argued that their own grain-based spirits made from aniseed suffered the same tax disadvantage as imported grain-based products, indicating that the tax system was not discriminatory against imports as such. In the same context, they pointed out that whisky consumption in France has grown over the previous 14 years at a rate at a rate roughly eight times as great as the rate of growth in cognac consumption.[149] In their view, this explosion of whisky consumption was clear evidence that the French tax system has not distorted the import market for whisky in any significant way.

The Court's response to the argument from Article 95(1) was inconclusive, explaining that the criteria presented (customs categories, functionality, flavor, and "consumer habits") were too variable in impact and not suitable classificatory schemes for making bright-line distinctions on the "similarity" of whisky and cognac for purposes of competition.[150] However, the Court proceeded to assert that it was unnecessary for the purposes of resolving this dispute to give a ruling on the question whether or not the spirituous beverages concerned are wholly or partly similar products within the meaning of [Article 95(1)] when it is impossible reasonably to contest that without exception they are at least in partial competition with the domestic products to which the application refers and that it is impossible to deny the protective nature of the French tax system within [Article 95(2)]. [151] The Court gave short shrift to the French arguments that their tax system did not favor domestic products over competing, but not necesarily similar, imported products: A characteristic of that system is in fact that an essential part of domestic production... come within the most favourable tax category, whereas at least two types of products, almost all of which are imported from other Member States, are subject to higher taxation.... The fact that another domestic product, aniseed spirits, is similarly placed at a disadvantage does not rule out the protective nature of the system as regards the treatment for tax purposes of spirits obtained from wine... or the existence of at least partial competition between those spirits and the imported products in question. As for the fact that the market share of whisky has increased..., this fact does not prove that there is no protective effect.[152]

7.2.2 The Cases Against Italy and Denmark [153]

When the Alcoholic Beverages Cases were handed down, the victory of the whisky industry was unqualified. The Court applied the line of reasoning used in the French case to resolve similar disputes in other Member States. Both Denmark and Italy had imposed taxation schemes that favored types of alcoholic beverages produced domestically over types produced primarily in other states, especially whisky. The Italian tax system was much like the French in favoring grape-based spirits, in this case over those made from grains (e.g., whisky) and sugar cane (e.g., rum). [154] The Court's conclusion as to the protective nature of Italy's system used much the same language as the conclusion in the French case. [155]

Like France, Denmark had argued that their protected spirits, aquavit, was culturally distinct from the imported products. The Danish government even produced "market surveys showing that aquavit, by virtue of Danish eating and drinking habits, is consumed principally at meals as an accompaniment to typical dishes so that it cannot be considered as a product equivalent to other spirits." [156] The Danes claimed that aquavit was more competitive with beer and wine than with other spirits.[157] The Court found otherwise. In fact, it found that Denmark had even violated Article 95(1), because, "of the products subject to the highest rate of tax there are several named beverages the characteristics of which are akin to aquavit.... It is necessary to assume that those products have been listed expressly among the spirits subject to a higher rate of tax precisely because of their similarity."[158] As to the other imported products, including whisky, the Court argued as it had in the French case that those imports were covered by the Article 95(2) prohibition, which Denmark had breached. "The fact that aquavit is preferred in Denmark by consumers as an accompaniment to certain typical meals does not prevent that beverage from still being used for other purposes" and thus potentially compete with imported spirits.[159]

7.2.3 The Wine and Beer Case [160]

The fourth of the Alcoholic Beverage Cases was distinctly different from its three companions, although the fundamental issue was essentially the same. While the cases against France, Italy, and Denmark involved discriminatory taxation involving different subcategories within the broad class of spirits, the case against Britain involved discriminatory taxation across two general categories that have traditonally been differentiated for most purposes: wine and beer. Britain, which had a thriving beer industry but virtually no domestic wine production, had imposed similar customs duties on both wine and beer before acceding to the Community. After accession, it had transformed those duties into excise duties, as required by the Community. However, Britain had then raised the level of excise tax on wine to a point significantly higher than that on beer. [161] The Commission, finding a trend to discriminate against wine in this way in several Member States, sought to make an example of Britain and end this discriminatory treatment, which had "harmful repercussions on the marketing of wines in the Community."[162]

Britain responded with arguments similar to those employed by the other defendant Member States. The British pointed to the fundamental differences in production methods for the two products, which the Court accepted as significant but not determinative. The British also argued that, "in accordance with long-established tradition in the United Kingdom, beer is a popular drink.... In contrast, the consumption of wine is more unusual and special from the point of view of social custom."[163]

The Court reached no conclusion in this case. It noted that the Commission's argument suggested wine and beer should be "subject to the same tax burden," but that some Member States imposed little or no excise tax on wine. Consequently, the Court sought more information from the Commission on the "appropriate tax ratio between two products which it regards as competing." [164]}

That information came to the Court in various forms over the next few years, particularly from the Commission and the Italian government, which made a vigorous intervention on behalf of its own wine industry. The Commission and the Italians showed that Britain has been burdening wine with a higher tax rate relative to all relevant criteria for applying taxation (alcohol content, volume, and price), and that the burden fell most heavily on the cheapest wines. [165] They also succeeded in persuading the Court that the cheapest, lightest wine (including that from Italy) was in direct competition with beer. The Court concluded that the United Kingdom's tax system has the effect of subjecting wine imported from other Member States to an additional tax burden so as to afford protection to domestic beer production, inasmuch as beer production constitutes the most relevant reference criterion from the point of view of competition. Since such protection is most marked in the case of the most popular wines, the effect of the United Kingdom tax system is to stamp wine with the hallmarks of a luxury product which, in view of the tax burden it bears, can scarcely constitute in the eyes of the consumer a genuine alternative to the typical domestically produced beverage.[166]

Although the Court established in this case a guideline for the proper tax ratio between beer and wine{167}, it did not resolve the issue raised in its 1980 interlocutory judgement concerning the failure of some Member States (including Italy) to tax wine at all--even though those States might tax beer.

7.2.4 Further Cases: Two Steps Forward, One Step Back

The Alcoholic Beverage Cases set standards (some clearer than others) for evaluating whether the taxation of alcohol is discriminatory in a given instance. Later cases in this area have both expanded their application and called some of their basic principles into question. Applying the Alcoholic Beverage Jurisprudence to VAT Cases

The European Court of Justice has not been hesitant to reaffirm the principles of the Alcoholic Beverage Cases. Having originated them with respect to excise taxation, the Court proceeded to expand their application to the value added tax. In one case, which was under consideration during the time the Court was reexamining the Wine and Beer arguments, the Court rejected Italy's imposition of a higher VAT rate on certain imported spirits, including gin, that had designations of origin or provenance.[168] In this case, the Commission's arguments were supported by Britain, which had an interest in preventing taxation by Italy that burdened British gin, among other alcoholic beverages, with a disproportionate share of taxes. Italy's defense was that spirits bearing a designation of origin were luxury goods, a category of higher quality that would have a smaller market in any case. The Italians claimed that to impose a greater tax burden on such products was "'simply to tax more heavily, for reasons of distributive justice, a luxury commodity the consumption of which was in itself an indication of greater contributive capacity.'" [169]

The Court, noting that designations of origin might mean nothing in the state of origin, even if they might be significant in Italy, was not persuaded that Italy's VAT scheme was anything other than protectionism. The Court reached the same conclusion again soon afterwards, when the French prompted the Commission to bring a case with respect to Italy's higher VAT rate on sparkling wines. [170] Similarly, in 1991, the Court ruled that Greece had breached Article 95 in its VAT scheme, which taxed certain alcoholic beverages produced domestically (including ouzo, produced nowhere else) at a lower rate than a broad group of alcoholic beverages, led by whisky, that were produced primarily in other states. [171] As the defendant governments had done in the Alcoholic Beverage Cases, Greece argued vociferously for the unique role that ouzo played in its national cultural context, a role that Greece claimed could not be filled by any other beverage. As usual, the argument failed. The Vinal and Chemial Cases

Even as the Court was creating a fundamental jurispudence on discriminatory taxation issues in the Alcoholic Beverage Cases, it was undermining some of the principles established there. In two cases brought while the Alcoholic Beverage Cases were under consideration, the Court upheld an Italian tax on synthetic alcohol that seemed to be discriminatory on its face.[172]} Although the alcohol in these cases was not for human consumption, the basic issue was related to those raised in alcoholic beverage jurisprudence. Italy imposed a heavier tax burden on synthetic alcohol, made from coal or oil, than on alcohol distilled from agricultural products, particularly raw materials left from the process of wine production. This arrangement was challenged because the synthetic alcohol was chemically and functionally indistinguishable from the agricultural alcohol.

Italy claimed that its purpose behind such taxation was a social policy of encouraging and supporting agricultural production and its associated rural way of life, as well as conserving hydrocarbon resources. According to the Italians, the higher taxation on synthetic alcohol would apply equally to domestic producers, but no Italian firm had found it economically viable to produce synthetic alcohol. Thus, Italy argued, it was only because no domestic competitive product existed that all products burdened with the higher tax were imported from other states. Surprisingly, the Court accepted these arguments, even though they clearly undermined the competition analysis in the Alcoholic Beverage Cases, which the Court did not mention in the Vinal and Chemial decisions.[173] The Johnny Walker Case [174]

The Court has not maintained consistency within its alcoholic beverage jurisprudence, either. The most obvious example is the Johnny Walker case, in which a Scotch whisky distiller challenged a Danish law that taxed whisky more heavily than domestically produced fruit liqueurs. Denmark, supported by the ubiquitous Italian government, argued that the two products were distinctly different according to criteria of raw material, production process, alcoholic strength, and classification within the general category of alcoholic beverages. The Danes also pointed out that the spirits category into which whisky fell also included many domestic products that were taxed at the same high rate. Notwithstanding the rejection of such criteria in the Alcoholic Beverage Cases, the Court accepted them here, concluding that Article 95(2) does not preclude the application of a system of taxation which differentiates between certain beverages on the basis of objective criteria. Such a system does not favour domestic producers if a significant proportion of domestic production of alcoholic beverages falls within each of the relevant tax categories. [175]

Whatever the Court's rationale may have been in upholding Denmark and Italy's tax policies in these three cases, it is still difficult to reconcile them with the Alcoholic Beverage Cases.

VIII. The Council Directives on Excise Taxation of Alcohol

Until 1992, the Court's jurisprudence was the only guidance available to Member States on the acceptable parameters for alcohol taxation. In that year, the Council finally adopted Directives on this issue. Those Directives represented the culmination of a long process in which the Commission attempted to translate the Treaty's principles on the free movement of goods and the harmonization of measures affecting trade into secondary legislation that would rationalize the patchwork of inconsistent and often protectionist laws constituting the Member States' alcohol taxation systems. In the event, the Directives have fallen rather short of this comprehensive vision.

8.1 The History of the Commission's Proposals

8.1.1 Early Harmonization

Studies In 1960, a working party was established to study the harmonization of excise taxation in the Community. The concept was promoted actively during the 1960s by the Neumark and Deringer Commissions, which recommended that excise harmonization proceed in parallel with harmonization of value added taxes. [176] It took until 1972 for the Commission to offer its first set of proposals on the issue.[177] Those proposals were quite comprehensive in their scope, including both detailed procedural recommendations and declarations of policy priorities regarding the application of excise taxes in Member States. However, in the stagnant political environment of the Community in the 1970s, the proposals went nowhere, notwithstanding their approval by the Parliament and Economic and Social Committee.[178]

8.1.2 The 1987 Harmonization Proposal

In the mid-1980s, as the Community began to show new signs of life generally, new excise tax harmonization proposals surfaced in the Commission's 1985 White Paper on Completing the Internal Market.[179]} The Commission found that excise taxes on the three major excisable products needed to be harmonized if the Internal Market were to be completed. In 1987, the Commission made final proposals for Council Directives harmonizating and approximating excise taxes, including those on alcohol. [180]

At that time, the rates, bases, and criteria for alcohol excise taxes varied considerably among the Member States. Converting the various tax schemes into one comparison of rates per litre on spirits, wine, and beer, respectively, showed enormous disparities.[181] Spirits were taxed as little as 0.19 ECU per litre by Greece and as much as 14 ECU per litre by Denmark. The other southern Member States (Italy, Portugal, and Spain) also taxed spirits at a low level (under 1.25 ECU per litre), while the other northern Member States (Britain and Ireland) taxed them highly (roughly 10-11 ECU per litre). The same pattern held for taxation of wine, as well. The southern States and Germany did not tax wine at all, while the three northern states taxed it at rates of 1.54 to 2.79 ECU per litre--more than the southern States taxed spirits. Even in the taxation of beer, the three northern States imposed a greater burden (0.68 to 1.13 ECU per litre) than did the rest of the Community (0.03 for France and Spain to 0.23 for the Netherlands). Perhaps the only surprise was the relatively high tax that Italy placed on beer (0.17 ECU per litre, fifth highest rate in the Community) in contrast to its very low taxes on wine and spirits.

The Commission's 1987 proposal responded to these wide variations by seeking some middle ground between the very high northern rates and very low southern rates. The proposal had the virtues of simplicity and consistency, compromising between the beer- and wine-producing interests by taxing both categories at the same rate on a volume basis.[182]} In order to steer between the many excise tax structures in existence at the time, though, the actual criteria used for each category were to be those used predominantly by the Member States: volume for wine, alcohol content for spirits, and specific gravity for beer. The proposal called for a single rate to be approximated by all Member States, which would have cause huge tax increases (and price rises) in southern States and large reductions in northern States. The Commission sought to make their proposal revenue-neutral overall. However, they did not attempt to compromise with the sensibilities of the individual Member States. Responses to the 1987 Proposal

The conceptual virtues of the 1987 harmonization proposal were its political defects. For an integrating Europe determined to achieve a Single Market, the proposal was well designed. However, for Member States hesitant to cede their fiscal autonomy, it was too extreme. Their responses are illustrated in the Economic and Social Committee's opinion on the proposal. [183]The Committee acknowledged that "more homogeneous conditions of consumer taxation will be needed in the single European market if distortions of competition are to be reduced and price disparities narrowed. To achieve this objective, existing systems or charging and possibly excise duties themselves will need to be standardized." [184] However, the Committee felt that standardization by 31 December 1992, as proposed, might be too precipitate, and that "it might be a good idea to build up a system of provisions and derogations which would also permit the standardization of rates after 31 December 1992." [185]

More fundamentally, the Committee attacked some of the proposal's substantive principles, arguing, for instance, that excise duties be set as low as possible to limit consumer price increases. The Committee also noted that 90 percent of Community wine consumption occurred in Member States with little or no excise tax on wine, and concluded, "Wine should therefore be exempted from excise duties. Beer could also be exempted in order to assure fair competition and because, like wine, it forms part of the normal everyday diet in many Member States." [186] The opinion also included numerous specific criticisms of the proposal's technical details and concluded stingingly, The approximation of excise duty of alcohol and alcoholic beverages is a particularly complex matter which the Commission would have done well to study in greater depth. It is absolutely vital to consult all EC Member States so that a proposal can be arrived at which, if not meeting with everyone's full approval, at least carries greater credibility for all concerned. [187]

8.2 The Final Directives (1992)

Not surprisingly, the Commission went back to the drafting table and revised the proposal considerably to find an accommodation with these concerns. After further review by Parliamentary committees and the Economic and Social Committee, the Council finally received a proposal and enacted Directives on the excise taxation of alcohol. However, in many ways the Directives enacted bore little relationship to the proposals on which they were based.

8.2.1. Revisions of 1989-90 [188]

The rigid and uncompromising structure of the 1987 proposals did not provide a viable basis for Community legislation. As the Commission itself put it later, The subsequent debate on those proposals led to a recognition by the Council and the Commission that complete rate harmonisation was not necessary for the completion of the Internal Market. What was required, however, was a system which, on the one hand, gave Member States flexibility in setting their excise duty rates, but which on the other hand encouraged convergence of rates. [189] Consequently, the Commission adjusted their proposal in various ways, particularly by adding more categories of alcoholic beverage (sparkling wine and intermediate products) and changing the single fixed rate for each category to a rate band. These bands included minimum rates for each category, considerably lower in every case than in the 1987 proposal, and a higher target rate towards which all Member States would be instructed to aim for future convergence. [190] Member States could unilaterally adjust their rate towards, but not away from, these target rates, which were higher than the rates in the original proposal, even for wine.

8.2.2 Responses to Revised Proposal

In the eyes of the various Community constituencies, the Commission had still not yet found the solution to the harmonization puzzle. The Economic and Social Committee, which criticized the 1987 proposal for its rigidity, now complained that "the Commission is proposing so much flexibility that it could defeat the purpose of the whole exercise, which is to standardize excise duties so as to ensure that they have a neutral effect on the movement of goods." [191] The Committee maintained its hope that excise duties could eventually be eliminated, and criticized the revised proposal for going the other direction by raising the target rate. The Commission had justified the higher rates on public health grounds, which prompted the Committee to respond, "It seems strange that the Commission did not take health considerations into account in its initial proposal," and to question whether any data supported the link between the rate change and the objective. [192]

The Economic and Social Committee was dominated by producers, workers, and consumers whose primary interest lay in lower prices and an undistorted market. The Parliament's voice was more fragmented, because those interests were almost balanced by public health advocates. The draft legislative resolution that was published as the first report of the Committee on Economic and Monetary Affairs and Industrial Policy (responsible for addressing the Parliament's position on fiscal matters) passed on a vote of only 14 to 13 (with one abstention). Thereupon, the original rapporteur resigned. The resolution amended the proposal to tax alcoholic beverages by alcohol content and to establish a clear parity between taxation of wine and beer.[193]

The bare technical nature of this resolution reflected the contentiousness of the issue. The Committee on Economic and Monetary Affairs received reports from two other Parliamentary committees that were diametrically opposed in their views. The Committee on the Environment, Public Health, and Consumer Protection voted almost unanimously for a report that recommended a compulsory deadline for achieving target rates (specifically the year 2000, as set by the W.H.O. Alcohol Action Plan); higher minimum rates for wine and beer, so as to avoid substitution effects from high taxes on spirits; and regular upward adjustments of rates to maintain their real value. [194] This strong declaration of public health priorities was balanced almost exactly by a near-unanimous vote in the Committee on Agriculture, Fisheries and Rural Development on their Opinion, which recommended little or no tax on wines of any kind. Citing the Wine and Beer Case, the Agriculture Committee applauded the equivalence of wine and beer rates in the Commission's proposal and suggested that the minimum rate for beer be lowered along with their recommended minimal wine rate, "even though the agricultural input in beer... is much lower than for wine and variations in consumption of the finished product (which can be regarded virtually as an industrial product) have less direct impact on farmers' incomes." [195] Unlike the Economic and Social Committee, the Parliamentary Agriculture Committee felt that yet more flexibility was needed for taxation of spirits, with lower minimum and higher target rates to allow the current extremes of taxation to be approximated more gradually. [196]

As the proposals were further amended and came back to the Committees for further consideration, the Parliament issued more reports that continued to reflect this severe split between the interests of public health and of economic development. [197] In its Second Report, the Committee for Economic and Monetary Affairs noted the geographical split within the Community on alcohol excise taxation and acknowledged the obstacles to harmonization: Whatever action is taken, the task will be a difficult one, and its implementation in final form undertain. The disparities in this area remain enormous, the "philosophies" applied differ widely, interests are highly divergent and sensitivities acute. It will be necessary simultaneously to adhere to the principle of abolishing frontiers, while taking into account regional and cultural disparities as well as preventing, in particular, distortions of competition, diversions of trade and losses of revenue. To reconcile these objectives will require a balancing-act that the Commission appears willing to attempt and which Parliament must not disturb if those two institutions want the Council at long last to confront its responsibilities. [198]

8.3 The Council's Role and the Enactment of the Directives

Unfortunately, the Council of Ministers does not leave the same paper trail as other Community institutions. It is in the Council's closed negotiation sessions that the hard bargaining is done which produces final legislation through mutual accommodations among Member States and blocs of States with shared interests. In the case of alcohol excise harmonization, the enactment of the harmonizing and approximating Directives in October 1992 [199] showed that the Council could "confront its responsibilities" and take a significant step towards creating a single internal market in this sensitive area. However, there was a high price to pay for political accommodation.

8.3.1 Terms of the Directives

Directive 92/83/EEC provides for harmonization of excise tax structures, while Directive 92/84/EEC provides for approximation of rates. Approximation of Tax Structure (Directive 92/83)

The approximation Directive instructs Member States as to the products to be taxed and the basis on which to tax them. The product classification scheme is based on customs tariff categories, the CN codes.

The wine category is bifurcated between still and sparkling wines; both fall under CN codes 2204 and 2205, with alcohol content (unfortified) of 1.2 to 15 percent (to 18 percent for still wine). The Directive taxes wine on the basis of volume, with a standard rate to be applied to all qualifying wines. It does permit a lower rate to be charged on wines with lower alcohol content (under 8.5 percent), and a higher rate to be charged by Member States already imposing a higher rate. [200]

Beer is defined as all products falling within CN code 2203. Beer that has been mixed with a non-alcoholic drinks also qualifies under this category, within CN code 2206. In either case, the alcohol content must be at least 0.5 percent by volume. Beer is to be taxed by specific gravity or alcohol content, and Member States may divide beer into rate bands based on specific gravity. [201] "Intermediate products" are those with falling under CN codes 2204, 2205, and 2206 that have alcohol content of 1.2 to 22% and do not fall under the beer and wine categories, essentially meaning that their alcohol content has been produced in some way that goes beyond fermentation. Intermediate products are to be taxed by volume, with lower rates permitted for products with lower alcohol content. [202] The fourth category, governing spirits, is termed "ethyl alcohol," emphasizing the central element of distilled beverages. It governs all products under CN codes 2207 and 2208 with an alcoholic strength exceeding 1.2 percent, even if those products also might fall within another CN category. It also governs all products within codes 2204, 2205, and 2206 that have a strength exceeding 22 percent. Finally, it governs all products that contain such "potable spirits." Products containing ethyl alcohol are to be taxed by alcohol content, with reduced rates for small producers and products with lower alcohol content. [203]

The Directive contains specific derogations in favor of France, for rum imported from overseas departments, and Greece, for ouzo, as well as continuing an exemption for Britain on certain heavy beers and aromatic bitters. [204] Approximating Rates (Directive 92/84)

Except for a few derogations, the harmonizing Directive appears to establish a coherent and comprehensive regime of alcohol excise taxation. However, the approximating Directive reveals the patchwork nature of this regime. The rates mandated are minimums only; although they may increase the rates imposed by a few Member States that have taxed minimally, they do not provide targets or attempt to cure potential economic distortion.[205]

The rate for ethyl alcohol, ECU 550 per hectolitre, is less than half of the minimum rate proposed in 1989. Moreover, derogations were granted through 30 June 1996 to Denmark and Italy, which were permitted to maintain their existing systems, with whatever discriminatory effects might remain. The minimum rate for wine is zero, reflecting the political weight of the wine-producing Member States. The minimum rate for intermediate products is set at ECU 45 per hectolitre, well below the minimum proposed in 1987. Only the minimum rate on beer, at ECU 0.748 per hectolitre/degree Plato or ECU 1.87 per hectolitre, is the same as the rate proposed in 1987.[206] Moreover, further derogations are granted to Greece, Italy, and Portugal, exempting them from imposing the duty in certain parts of their national territory. [207]

8.3.2 Impact of the Directives

The Directives have distorted the simple and coherent proposals of the Commission practically beyond recognition and reduced their impact significantly. The complexity of the provisions has replicated in many ways the complexity of the current national regimes. Derogations have provided specific loopholes, and open-ended requirements to impose taxes with minimum levels--with no higher targets--furnish a broad scope for abusing the spirit of harmonization. Moreover, the inconsistent application of rates to the different categories, and above all the failure to set a minimum for wine, introduces the potential for distortions of competition in favor of wine and wine-producing Member States.

This unequal treatment of wine and beer would seem to fly in the face of the reasoning of the Wine and Beer Case. It has been argued that such a result is legally and economically defensible because beer is produced everywhere in the Community. [208] However, the southern Member States produce much more wine than beer, and their agricultural interests seem to be favored in the Directives as in other areas of Community policy.[209] Some of the derogations may be more justified, such as the imported rum whose market is almost exclusively within metropolitan France. However, the ouzo derogation in particular runs directly counter to the Court of Justice's holding in the VAT case involving ouzo, as well as the Alcoholic Beverage Cases generally.[210] As of yet, no national excise scheme complying with the Directive has been challenged in court, but even if some provisions might appear to permit discriminatory taxation, the resulting scheme would probably not hold up under Article 95.

8.4 Further Developments

8.4.1 Commission Reports Directive 92/84 mandated future biennial studies by the Commission of alcohol excise rates, with appropriate adjustments as necessary. In 1995, the first mandated report was issued. [211] This report shows that very little change has occurred in rates since enactment of the Directives. The report also suggests that the low rates on wine and in some Member States on all alcoholic beverages exert a downward pressure on taxation throughout the Community, even in Scandinavia, where rates are very high. Another report is due at the end of 1996.

8.4.2 New Member States

Among the three newest Member States, Austria has reduced its wine tax to zero to match neighboring Italy and Germany, while Sweden and Finland, with astronomical rates and grave public health concerns, have negotiated derogations like Denmark's to allow them to continue limiting consumption to the greatest degree possible. [212] A Swedish public health report stated in 1995 that EU membership has had the effect of moving the conditions of the Swedish alcohol policy.... In the long term, EU membership can entail downward pressure on alcohol prices in Sweden. This has the effect of weakening Swedish alcohol policy, the backbone of which is restrictions limiting the availability of alcohol by means of high prices and an alcohol monopoly.... The menace of growing alcohol- and drug-related injuries thus implied calls for an intensification of public policy measures.[213]

Studies conducted for Sweden suggest that, far from decreasing alcohol consumption, abolition of the state alcohol retailing monopoly and reduction of alcohol prices (through decreased taxation) would increase consumption substantially. Lowering prices even to the level of Denmark--currently among the Community's highest--would mean a drop of 50 percent for beer, 25 percent for wine, and 15 percent for spirits; that could result in an increase of consumption of about 50 percent over 1992 levels. [214] A more severe reduction of prices to German levels would mean a drop of 60 percent for beer, 50 percent for wine, and 60 percent for spirits, resulting in a potential consumption increase of about 100 percent over 1992 levels.[215]

8.4.3 Bossard Report

The Commission continues to study the issue of excise taxation and appropriate rates. In 1994, they received the results of the "Bossard Report", commissioned from French consultants, showing that economic competition does in fact exist between different categories of alcoholic beverages. [216] The Report includes extensive statistical documentation, both internally to individual Member States and across the Community as a whole. It will no doubt contribute to the effort to harmonize excise rates in a rational manner.

8.4.4 1995 Excise Conference

In November 1995, the Commission held a conference at Lisbon to gather the views of Member States, industry groups, public health advocates, and other interested parties. [217]The opinions expressed there were familiar to anyone who has followed this issue; no one's position has changed significantly. However, three years after the Single Market changes have taken effect, it is becoming possible to see, for instance, the impact of cross-border shopping, gross disparities in rates on different products, and other potentially problematic aspects of the tax regime mandated by the Directives. [218]

IX. The New Regime: Half Empty or Half Full?

From one point of view, the alcohol excise Directives constitute a major step in the integration of Europe. From another point of view, they are an insubstantial veneer of cooperative legality on the competitively autonomous actions of Member States. Is the glass half-empty or half-full?

9.1 Half Empty

It is easy to see why the Commission's 1987 proposal failed to win support. Harmonizing taxation (besides VAT) has proved problematic for the Community generally, as the ability to raise revenue is one of the most critical dimensions of government. The more states are added to the Community, the more difficult it will become to harmonize fiscal matters, so long as unanimity is required. Every negotiation becomes a case of bargaining under the shadow of the veto, and every piece of legislation is likely to emerge like these Directives, with sweeteners added for every State that does not like the basic regime.

Alcohol is inherently problematic for harmonization, as well. The issue of regulating alcoholic beverage consumption raises too many conflicting concerns, particularly about public health, cultural survival, and economic competition. There are various different compelling viewpoints, each given different weight in different Member States and within Community institutions. Flexibility in alcohol taxation is useful to states generally, and particularly so where national identity becomes an issue. The derogations in the Directives show that the arguments raised in the Alcoholic Beverage Cases have not yet been put to rest.

9.2 Half Full

Although the Directives cannot be considered fully (or even significantly) effective in establishing a harmonized non-distorting alcohol taxation regime, they provide an institutional foundation for such a regime. In general, Directive 92/83 on harmonization of structures is fairly sound and needs little legislative amendment to make it serve the ultimate ends of reducing distortions in the market while permitting Member States to raise revenues. It is primarily the rate structures, and the derogations accompanying them in Directive 92/84, that need corrective surgery. But even that Directive is potentially self-correcting, as it mandates flexibility for adjusting rates biennially. Based on information from the Commission (as gathered from sources such as the Bossard Report and Excise Conference), the Council could adjust rates in the future to ensure less market distortion.

Moreover, the very fact that the Directives have been enacted at all is significant to the extent that they represent substantive action in an area where "the 'philosophies' applied differ widely, interests are highly divergent and sensitivities acute." [219] In a Europe still seething with nationalistic fervor and ancient resentments, it is to some extent remarkable that any agreement could be reached on such a touchy subject.

X. Conclusion: Constructing a European Identity

The enactment of the alcohol taxation Directives is not a great milestone in the history of European integration, However, it may arguably be a valuable indicator that the Member States have begun to take seriously their mutually agreed commitment to "an ever closer union of the European peoples." It is in areas such as this, where traditional passions and jealousies intersect with hard economic realities, that the hardest work is to be done, for unlike the single-event issues that will be resolved once a decision has been made, excise taxation is an ongoing activity that continues to require adjustment at whatever level there is political authority to do so. For the Community to operate effectively here, there must develop some sense of shared enterprise or identity of purpose. The enactment of these Directives suggests that such an identity may indeed be developing.

10.1 A Unique Problem

As we have noted, the question of how to locate or develop a collective European identity has caused considerable concern to those who feel that the Community's future is clouded so long as national and regional interests dominate. This problem is not unusual in building an empire or a centralized federal state such as the former Soviet Union or former Yugoslavia. However, the position of the European Union) is unique in history. No models exist for the voluntary integration of so many large and well-established independent states, each with its own deeply-rooted culture, into one economic and political entity.

10.1.1 Identity and Allegiance

The European Union continues to endure acute and chronic crises that test its cohesion and illuminate something about the extent to which Member States and their people have transcended traditional loyalties and developed a sense of allegiance to Europe. The current crises as of this writing are mad cow disease (acute) and the run-up to the European Monetary Union (chronic). In Spring 1995, the acute crisis was the fishing dispute between Canada and Spain, which put Britain in particular on the spot. After initially following the Community line and backing Spain, Prime Minister John Major spoke to the House of Commons in a manner that "reflected widespread British feelings that the nation's ties of loyalty, blood and history with Canada transcend any obligation to membership in the... European Union." [220] Those feelings were bipartisan. Peter Shore, a Labor Member of Parliament, called the dispute "'a defining moment. The real question is where Britain's loyalties lie: with the European Union, of which, since the Maastricht Treaty, we are 'citizens', or with Canada to whom we are intimately bound by ties of history, language, people and common endeavor in war and peace.'" [221] And, putting the issue into a larger perspective, the Conservative peer Lord Michael Morris said, "'I doubt that any nation can retain its identity or self-respect if it abandons the ties of family, of history, of shared beliefs and hopes and experience.'"[222]

10.2 Europe's Challenge

Europe's challenge in developing a collective identity is to transmute these "ties of family, of history, of shared beliefs and hopes and experience." However, doing so is not merely a matter of inducing the peoples of Europe to look forward rather than backward and outward rather than inward. The hot British rhetoric over the fishing dispute between Canada and Spain reflected more than just a deep sense of allegiance to Commonwealth cousins. It evoked memories of Canadians fighting alongside the British in World War II while Spanish Fascists under Franco made common cause with the Nazis. The situation also reminded Britons of the Falklands War, when Spain sided against its Community partner Britain and with Hispanophone Argentina. Perhaps the most important factor in turning British public opinion against the Spanish, though, was that the very issue at stake in the dispute with Canada--aggressive ventures by Spanish fishing interests--had been a source of ongoing tension between Spain and Britain itself, as the Factortame case illustrates. [223]

footnts.html footnts.html This conflation of ancient cultural heritage with current economic interests is a classic feature of discriminatory treatment and protectionism. It may be naive to accept the rhetoric of cultural preservation as a full explanation, but it is equally unrealistic to assume that all decisions are made purely on the basis of calculated economic interest. If that were the case, integration might well be easier to achieve in Europe. As commentators such as ÿrstrom Møller have pointed out, "nonmaterial" considerations also play a crucial role. [224] After a millennium of cultural differentiation and rivalry in economic and other spheres, it may be premature to expect a radical shift in grass roots attitudes towards political and cultural identity.

10.3 International Cooperation and Identity

It is a commonplace among international relations scholars that most states observe most of their international obligations most of the time. Realist theorists have always argued that such compliance occurs because states fear sanctions of one kind or another. However, recently some theorists--particularly some with legal training--have begun to promote the idea that compliance results predominantly from states' expectation of positive outcomes. Abram and Antonia Chayes have proposed a theory of compliance based on "the general propensity of states to comply with international obligations," an assumption that they argue lies at the heart of the work of foreign ministers, diplomats, and government leaders. In their view, the great effort expended on treaty drafts and other international agreements "makes sense only if the participants accept (presumably on the basis of experience) that as a general rule, states acknowledge an obligation to comply with the agreements they have signed." [225] The Chayes support this assertion with an analysis of the efficiency, interest, and norm-driven considerations that contribute to states' propensity to comply.

Similar conclusion have been reached by others, including John Setear in his work on the iterative dimension of international relations. [226] Setear argues that, as states work together in the different stages of the treaty process, they become more familiar with one another and begin to develop a firmer relationship based on their previous experience. Thus, the success in completing one step of the process, and the willingness of each party to comply with that step, can provide a foundation for the step(s) to follow.

This type of argument has been carried even further by Alexander Wendt, who has suggested that states in an international system, which they have entered voluntarily on a friendly basis, may develop a sense of collective identity through the process of working together within that system. [227] This process requires that the system have some continued functional utility, but it is not mechanical. The thesis presupposes some shared goals or values within the system but does not require a strong ideological focus. In a sense, it reflects the process of any group of egoistic (but essentially non-adversarial) actors who find themselves in a situation where they need to work together if they want to improve their own opportunities.

Wendt's thesis, which has not yet developed into a fully articulated theory, sees identity development as a moving target with many variables: The existence of multiple loyalties is at the heart of the debate over "European identity" and may generate substantial role conflict. Resolutions of such conflicts are never permanenet or fixed, however, and their evolution cannot be studied if we take interests as given. Thus, I am not suggesting that collective interests replace egoistic ones as exogenously given constants in a rationalist model but rather, that identities and interests be treated as dependent variables endogenous to interaction. This would allow us to treat collective action not merely as a problem of changing the price of cooperation for self-interested actors but as a process of creating new definitions of self. [228]

Wendt identifies two "systemic processes," each one long enshrined in liberal international relations theory, as operating to encourage the evolution of transnational collective identity. One is the interdependence of state actors, whether objective or subjective. The other is "the transnational convergence of domestic values."[229] Both systemic processes are visible in the harmonization of alcohol taxation in the Community. However, they are not rapid or conclusive processes. To the extent that Europe fits Wendt's model of an emerging "international state," it is still in the formative stages.

10.4 Constructing a Functional European Identity

Returning to Philip Schlesinger's view, with which we began the closer scrutiny of European identity development, he too suggests that, if there is a plausible story of emergent Europeanness to be told, it will probably have to be rooted in a gradualist saga of growing together through institutionalist sedimentation, the patient outcome of the longue durÈe rather than the quick-fire product of technocratic rationalism.{230} After all, it is only through shared experience that states and their peoples develop the sense of mutual loyalty which the British claimed to feel in the Canadian fish dispute. The European situation involves more than simply state actors or traditional groupings of peoples, because it is affected also by the actions of Community institutions. Those actions can either help or hinder the development of collective identity by making it more or less attractive. Moreover, it is not enough for the state governments to draw closer together; their peoples must also feel involved.

Member States will permit integration to proceed at the rate that their complex domestic and international concerns allow. They will continuously balance the perceived benefits of integration against the perceived burdens or deprivations of political, social, economic, & cultural autonomy. Each Member State's integration will likely be gradual. In crucial areas where Community law requires unanimity in decision-making, such as fiscal matters, the process of integration for the Community as a whole can move no faster than that of the Member State that is moving most slowly. Bringing the most cautious or recalcitrant states up to speed with the rest of the Community will require a continuous process of negotiation, concession, and derogation unless and until a "European identity" or sense of common purpose develops enough momentum to overcome national resistance.

The European glass of identity will probably never be completely full, because the very concept of "Europe" is something of an abstraction. However, from a historical perspective, the fact that there is a glass at all (that is, a European Union) is rather remarkable in itself. The harmonization of alcohol taxation in Europe reflects a complex interaction of Member States, regional interests, transnational interests, and European institutions. Although it is not as glamorous, provocative, or cataclysmic as some other issues that have been used to measure the pace of integration and identity development, it is perhaps a more subtle and reliable indicator. So long as any supranational European entity exists that seeks to regulate such a sensitive dimension of daily life, the ongoing issues raised by alcohol use and taxation will continue to be present.


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Cases Cited

European Court of Justice

  1. Case 127/75, Bobie v. HZA Aachen-Nord, 1976 E.C.R. 1079
  2. Case 120/78, Rewe-Zentral AG v. Bundesmonopolverwaltung fur Branntwein, 1979 E.C.R. 649, [1979] 3 C.M.L.R. 494
  3. Case 168/78, Commission v. France, 1979 E.C.R. 347, 2 C.M.L.R. 631 (1981)
  4. Case 169/78, Commission v. Italy, 1980 E.C.R. 385, 2 C.M.L.R. 673 (1981)
  5. Case 170/78, Commission v. United Kingdom, 1980 E.C.R. 417, 1 C.M.L.R. 716 (1980); 1983 E.C.R. 2265
  6. Case 171/78, Commission v. Denmark, 1980 E.C.R. 447, 2 C.M.L.R. 688 (1981)
  7. Case 140/79, Chemial Farmaceuti v. DAF, 1981 E.C.R. 1, 3 C.M.L.R. 350
  8. Case 46/80, Vinal v. Orbat, 1981 E.C.R. 77, 3 C.M.L.R. 524
  9. Case 319/81, Commission v. Italy, 1983 E.C.R. 601
  10. Case 278/83, Commission v. Italy, 3 C.M.L.R. 688 (1985).
  11. Case 243/84, John Walker & Sons v. Ministeriet for Skatter og Afgifter, 1986 E.C.R. 875, 2 C.M.L.R. 278 (1987)
  12. Case 323/87, Commission v. Italy, 1989 E.C.R. 2275, 1 C.M.L.R. 67 (1991)
  13. Case 230/89, Commission v. Greece, 1 C.M.L.R. 869 (1993).

Other Courts

  1. Rex v. Sec'y of State for Transport, ex parte Factortame Ltd., [1990] 2 AC 85.

European Legislative Materials

  1. Council Directive 92/12/EEC, 1992 O.J. (L 76) 1, as amended by Council Directive 92/108/EEC, 1992 O.J. (L 390) 124.
  2. Council Directive 92/83/EEC, 1992 O.J. (L 316) 21
  3. Council Directive 92/84/EEC, 1992 O.J. (L 316) 29
  4. Doc. COM(72) 225 Final
  5. Doc.COM(85) 310 Final
  6. Doc. COM(87) 0325, modified by COM(87) 0325 Final/2, 1987
  7. O.J. (C 251) 3
  8. Doc. COM(89) 527 Final, 1990 O.J. (C 12) 12
  9. Doc. COM(90) 432 Final,
  10. 1990 O.J. (C 322) 11
  11. Opinion of the Economic and Social Committee on [COM(87) 328 Final], Doc. CES 746/88, 7 July 1988
  12. Opinion of the Economic and Social Committee on [COM(89) 527 final], Doc. CES 832/90, 5 July 1990
  13. Report of the Committee on Economic and Monetary Affairs and Industrial Policy on [COM(89) 527 Final], PE Doc. A3-317/91, 12 November 1991
  14. Second Report of the Committee on Economic and Monetary Affairs and Industrial Policy on [COM(90) 432 Final], PE Doc. A3-386/91, 19 November 1991
  15. Second Report of the Committee on Economic and Monetary Affairs and Industrial Policy on [COM(89) 527 Final], PE Doc. A3-387/91, 20 November 1991
  16. Third Report of the Committee on Economic and Monetary Affairs and Industrial Policy on [COM(89) 527 Final], PE Doc. A3-96/92, 28 February 1992


  1. Council Directive 92/83/EEC of 19 October 1992 on the Harmonization of the Structures of Excise Duties on Alcohol and Alcoholic Beverages, 1992 O.J. (L 316) 21
  2. Council Directive 92/84/EEC of 19 October 1992 on the Approximation of the Rates of Duty on Alcohol and Alcoholic Beverages, 1992 O.J. (L 316) 29
  3. Case 168/78, Commission v. France (Whisky and Cognac), 1980 E.C.R. 347
  4. Case 170/78, Commission v. United Kingdom (Wine and Beer), 1983 E.C.R. 2265
  5. European Commission, Report to the Council and European Parliament on the Rates of Duty Laid Down in [Council Directives 92/79/EEC on Cigarettes, 92/80/EEC on Other Manufactured Tobacco, 92/82/EEC on Mineral Oils, and 92/84/EEC on Alcohol], Doc. COM(95) 285 Final, 13 September 1995 (excepting all sections directed solely towards the excise taxes on tobacco and mineral oil products).



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