NEW YORK (CNN/Money) - It's been a tough few years for French winemakers.

First, a rash of competitors-- from Australia to Spain -- showed dramatic gains in quality and quantity. Next, the Euro soared and made France's already pricey bottles cost even more in the United States, the world's biggest wine market.

Then the controversial war in Iraq led to scattered U.S. boycotts and a frantic response by pro-American winemakers to "ignore our politicians, s'il vous plait."

The news hasn't been so good on the homefront, either. The French themselves are drinking less and less. Domestic consumption dropped by a fat 5 percent last year, and the average person in France now drinks only half as much wine as in the 1960s.

And they're even drinking a bit more imported wine there now.

Clearly, these are desperate times for an industry that exported $6.9 billion worth of product last year, and which employs some 300,000 people.

As recently as the 1990s, one in three imported bottles bought by Americans was French. Today, it's down to 15 percent.

Despite particularly good vintages, U.S. sales of French wine declined more than 10 percent last year in both volume and dollar value, according to Information Resources International.

"2003 was without a doubt a difficult year," said Francois Loos, France's foreign trade minister, in a June interview. "This has been a wakeup call."

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In a recent essay, New York Times wine critic Frank J. Prial examined the fate of Bordeaux's approximately 10,000 wineries, especially its hard-hit small producers.

The region's famous, eternal chateaux produce only 5 percent of its wine. "For the 95 percent outside this magic circle," Prial wrote, "life has grown grim."

Like some fable of the French Revolution, it's a tale of the rich getting richer while the commoners struggle. Prices for recent vintages from the grand chateaux have risen dramatically. Meanwhile, lesser wines from Bordeaux barely sell at all.

It's an axiom of economics that sagging demand for goods can be stimulated by price cuts. But small producers have lowered their wholesale prices by 30 percent or more, yet still cannot move enough bottles to be viable.

The crisis may force 1,000 wineries out of business, according to Prial, "in what was the undisputed capital of the wine world."

While wholesale prices may be falling, the American consumer hasn't seen much in the way of discounts.

"If prices are dropping, it's happening over there, not being passed through to consumers in the U.S.," says Dana Decker, owner of Decker's Wine and Spirits in Fayetteville, N.Y. "Importers are using any price breaks they're getting as a hedge against a declining dollar."

Even if retail prices were to fall dramatically, it might not help all that much. The French wine business has bigger problems.

Across France, grapes cost too much to grow. One vineyard owner in a region east of Bordeaux recently told a reporter for London's Independent that his crop costs 5,000 per hectare to produce, but can command only 3,000 per hectare when sold in bulk.

With the world awash in generic grapes, only vineyards that can establish themselves as a brand stand a chance. Unfortunately decades-old regulations prohibit French producers from marketing themselves to the world in a modern, international way.

One of the more hidebound of those rules is that wines designated by regional appellations -- Burgundy and Bordeaux are the best known, but there are hundreds -- must adhere to very specific, sometimes arcane, rules of production and marketing.

For example, if a winery wants to call its wine a Burgundy, it is legally prohibited from mentioning on the label that its grapes are Pinot Noir. That's a problem if it wants to compete directly with, say, a wine from Oregon or Australia made of the same grape.

"Americans walk into a store and ask for a Chardonnay or a Cabernet," says wine merchant Decker. "They don't come in and start rattling off the names of this or that obscure chateau."

The French are discussing allowing Bordeaux and Burgundy makers to produce vin de pays, which would allow them to label their wines by the varietal name. But the fact that it's even worthy of debate indicates just how convoluted it can be to reform the industry.

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A bigger issue than labels is how wines taste and what production techniques can be used to get them that way. Here, too, French regulations favor tradition over innovation.

Irrigation systems in many regions, for instance, are generally a no-no -- the law says you have to rely on Mother Nature. The use of wood chips during fermentation to control a wine's astringency has also been prohibited, even though the modern practice is widespread elsewhere.

The downturn is severe enough that both these bans are finally likely to be changed, along with various other practices that more nimble rivals abandoned long ago.

In Alsace, they're even experimenting with the heretical notion of genetic modification of vines to make heartier and more productive grapes.

It's hard to predict whether new rules and new approaches will go far enough. But the industry does seem finally willing to give its competitors a fight -- and on the world's terms, not France's.

The Good Life is a weekly column that chronicles products, people and trends in luxury consumer goods, travel, and fine food and drink. Write to: goodlife@money.com.