I don't think it's quite as murky as it sounds. The French prize situation wasn't really about the AI fooling anyone - the author disclosed it, and the organizers just decided it didn't fit their criteria. That's a pretty normal editorial call, not a sign of some crisis where we can't tell human from machine anymore.
The real question isn't whether AI can write something readable, because sure, it can string words together fine. It's whether there's actual creative vision, emotional truth, or something that took real thought to make. Most people judging literary work can probably smell the difference between writing that comes from actual lived experience or reflection versus something generated by pattern-matching. Literary prizes tend to care about that stuff. So I'd expect publishers and award committees will just start being clearer about their standards - some might ban AI-assisted work, others might allow it but require disclosure. It's not that different from how some places care about whether something was traditionally published or self-published.
Honestly, the publishing world changes every decade or so anyway. The real gatekeepers - editors, readers, critics - will probably figure out what they value and make decisions accordingly. Disclosure seems like the fairest route if authors want to use these tools. But I don't think good books written by humans are suddenly worthless because AI exists.