Government officials and others would like to see Greece’s economic model be transformed into a more export and investment oriented one at the expense of consumption. However, six years after the longest and most severe output contraction since World War II, and four years into the International Monetary Fund, European Union designed economic adjustment program, this transformation is not so visible. Tourism appears to be the bright spot. In this regard, Greece may have to direct more resources into the high flying industry to boost exports, stimulate investments and spearhead GDP growth in the next few years.
A relatively recent report by Eurobank shows it is going to take a while, if ever, for a drastic overhaul in the country’s economic model to take hold. Excessive austerity has indeed compressed private consumption spending to 68.5 per cent of GDP last year from a record 73.3 per cent in 2009 and 72 per cent in 2008. The calculations were based at real prices of 2005. However, despite all the talk about cuts in state consumption spending, government consumption eased to 18.9 per cent of GDP in 2013 from 19.3 in 2009 and is higher than in 2008 where it stood at 17.9 per cent. As a result, imports have taken a beating, falling to 28.3 per cent of GDP last year from 31.5 and 38.3 per cent in 2009 and 2008 respectively. These developments are in tandem with the new economic model but are largely due to restrictive policies which cannot go on forever.
On the other hand, the Eurobank estimates confirm the sharp drop in investment spending we have also repeatedly highlighted in the past. This component of aggregate demand dropped to 13.9 per cent of GDP last year from 18.6 per cent in 2009 and 24 per cent in 2008 based on 2005 prices. It is the most worrisome development since it adversely affects current aggregate demand and undermines future growth prospects. Exports appear to be doing relatively well, with their share to GDP rising to about 27 per cent in 2013 from 20 per cent in 2009 and 24.2 per cent in 2008. But it reflects to some effect both price rises in merchandise exports and the strong performance of the tourism industry in the last couple of years.
If Greece really wants to transform its economy, it has to take a number of initiatives towards that goal. Boosting the tourism industry should be a top priority because it can increase both exports and investments. Meeting the goal for 2021 tourist receipts set in a report prepared by McKinsey cited by SETE, the Association of Greek Tourism Enterprises, could be a good start.
According to Andreas Andreadis, president of SETE, the 2021 goal calls for revenues of 18 billion euros on 24 million international arrivals and 3.5 million visitors from international cruise vessels. It is reminded SETE expects receipts will exceed 13.5 billion euros this year from about 12 billion in 2013 on international arrivals of more than 19 million tourists compared to 17.9 million last year. The number of visitors from cruise vessels is to stay broadly unchanged at 2.2 million.
Reaching the 2021 goals may be challenging but it is feasible despite the cyclicality of the tourism industry and the uncertainty often posed by geopolitical events. Meeting the revenue target will depend both on the number and mix of international arrivals as well as per capita tourist spending. Since tourists arriving by road spend much less than those arriving by air, efforts should be made to increase the share of air arrivals. This should have a positive effect both on total and per capita tourist receipts. In this respect, the privatisation of Greece’s 14 regional airports, including Thessaloniki’s, is important because it can boost investments by some 300 million in the next four years and increase significantly the number of tourists to popular destinations, i.e. islands.
Greece cannot just stay idle and expect additional millions of tourists to arrive in coming years without being able to support the great influx. This requires sizeable investments to the tune of 24 billion euro to meet the 2021 targets in the McKinsey report. Moreover, these investments should be frontloaded. It is estimated the country will have to add about 150,000 new beds and an additional 100,000 have to be renovated to be able to host 24 million tourists in 2021 and improve the money for value tradeoff to see per capita tourist receipts go up to 800 euros from an average 660 euros in 2013 and the expected 700 euros this year.
SETE’s Andreadis says the state could invest 4.0 billion euros and the rest could come from the private sector. It sounds nice but this may turn out to be more challenging than hosting 24 million tourists in 2021. The worst thing for Greece would be to disappoint tourists because of strained capacity. So, a national plan has to be drawn to identify and finance the necessary upgrade of infrastructure and facilitate other investments to increase bed capacity in the tourism industry. Perhaps EU structural funds could help to that extent. The country could also benefit from developing the second home market, directed primarily to tourists. This way, it could also boost exports via tourism and investment spending.
There are reasons to believe the tourism industry could be a catalyst in both helping exports and the revival of investment spending in coming years. This way the much sought transformation of the Greek economy into a more export and investment oriented one will be facilitated. However, meeting ambitious future targets for the industry requires a national plan to increase international air arrivals and frontload investments for modernising the country’s infrastructure, increase bed capacity and renovate existing beds.
*Dimitris Kontogiannis holds a PhD in macroeconomics and international finance.