The Spanish wine industry is facing long overdue restructuring under the reforms of EU wine subsidies, while sales are being hit at home and abroad by the recession. Although there has been some growth in exports, this has been mainly in bulk wine, and Chris Losh expects things to get worse before they get better.

Barely two years ago, the Spanish press was full of delighted self-congratulation. Driven by tens of billions of Euros of European development budget and a buoyant construction industry, the country's economy was booming to such an extent that per capita earnings were expected to surpass those of Italy by the end of 2009. Spain, the leader writers opined, had arrived.

Now the cranes stand silent beside unfinished luxury apartments and abandoned holiday developments, and the only growth area of the world's eighth largest economy is unemployment. Already the highest in Europe, at 15.5%, some economists are predicting that it could reach 20% by the end of 2010, with hundreds of thousands of low-skilled labourers clogging up the jobs market.

The small regional banks - reckoned to be highly exposed to toxic housing debt - are shaky, and are warning householders not to miss a single mortgage payment or they risk repossession.

Unsurprisingly, against such a bleak backdrop, consumer confidence has tumbled. Last month, Spain became the first economy in the eurozone to post an annual rate of deflation, with prices 0.1% lower than the previous year.

It's all bad news for the country's wine industry, which already had plenty on its plate before the economy imploded.

For starters, it produces too much wine. 2008 was, at over 40m hectolitres, pretty much a standard year (2004, for instance, was over 50m hl). Yet still it's a larger vintage than required. Whereas the mid-1990s saw harvests of around 33m hl, Spain is now producing 40-42m hl of wine every year - far more than it can reasonably sell. This was already keeping prices low, even before the arrival of the credit crunch, with 'crisis distillation' the norm.

Well, not for much longer. Under Mariann Fischer-Boel's agricultural reforms, Brussels is gradually phasing out crisis-distillation subsidies, with more money, instead, being made available for the conversion of uneconomic vineyards to more viable crops.

Certainly, the production side of Spain's wine industry could do with a bit of a brush-up. Of the country's 1.12m hectares of vineyard, currently around a quarter is given over to the utterly undistinguished (white) Airen grape. To put it another way, Spain has twice as much as Chile's entire vineyard area dedicated to producing a grape that makes wine that isn't worth drinking.

If the Fisher-Boel proposals provide impetus to get the country's vineyard area below 1m ha, then so much the better. Long-term there is little question that the structural changes are necessary, but in the short term they are leading to what one observer called 'an atmosphere of uncertainty'.

Last year saw applications for the grubbing up of almost 100,000 ha of vineyard - just under 10% of the total. This, clearly, is an industry in flux - as growers reassess their options in light of the combination of difficult market conditions and changes in subsidy rules.

For sure, there is little in the Spanish domestic market to entice waverers to stay in the industry - market analysts AC Nielsen put off-trade volumes down 8%. But arguably more significant is the fact that the value is falling out of the market. All the growth is in the lowest priced segments, at EUR2/litre and less, with the more expensive wines - Denominacion de Origen and sparkling - hardest hit.

In the on-trade, meanwhile, the figures are tougher still. Sales are down 6% and volumes 10%. Clubs, fast-food outlets and hotels have been worst affected, suggesting that while lunchtime and after-dinner drinking might still be a big part of Spanish culture, consumers are drawing back from the longer evenings out. Again, across the board, prices per litre have tumbled.

For some relief, the beleaguered Spanish wineries need to look abroad, with exports once again on the up.

"We're seeing the same trend as in previous years - exports are up, and there's less internal consumption - but the trends are exaggerated," says Rafael del Rey, director general of the Observatorio Espanol del Mercado de Vino.

Certainly, export growth of 8% last year was impressive, but it was driven in no small part by big rises in bulk sales to France, Italy and Portugal. Sales to the 'value markets' of the UK and the US declined.

Spain will not want to think that the last 20 years of wine boom have left it with a reputation of being the world's top supplier of cheap bulk. A position that will, in any case, come under threat as other (New World) countries look for ways to offload surplus wine as global demand falls.

With a hastening decline in consumption at home, and the only area that appears to be in growth (both home and abroad) at the bottom end of the price scale, it's probably not too hyperbolic to say that the Spanish wine industry is facing a crisis over the next few years.

How many vineyards and wineries, I wonder, will be standing as abandoned and silent as Almeria tower blocks in five years' time?