Tourism in Southern Europe: A glass half full
While many of my clients and I myself were cautious in sketching out how the economies of South East Europe may fare this year, it is now increasingly clear that GDP growth will be significantly higher than what we all thought initially. Largely thanks to the rebound in tourism this year.
All of Mediterranean Europe (and Bulgaria) will record excellent peak tourist seasons this year. In the context of policy debates at the EU level this is welcome. Namely, with economic growth rebounding more quickly in Southern Europe, the divergence in economic fortunes between member states will be smaller. This can only make negotiations over macroeconomic policy issues in the EU easier. However the September 26 general election in Germany turns out, and the latest polls suggest a Wahlkrimi or an extremely tight race, Southern European member states with stronger economies will have more influence than would otherwise be the case.
Furthermore, the pickup in tourism is broad based in the sense that it does not discriminate whether a nation in an EU member state (Montenegro), a recent entrant (Bulgaria, Croatia), or a long-term member (Greece). All of these countries are reporting increases in foreign tourist visitors in the order of 50% yoy for July and August. In other words, many of these countries are close to the revenue and visitor numbers achieved in pre-pandemic 2019.
As welcome as all of these indicators are, concerns that the economies of these countries may be too dependent on tourism abound. I have a number of issues with this approach.
Is tourism the scourge it is often made out to be?
To begin with, this approach attacks the issue from the wrong direction. Namely, is it perhaps the case that other sectors of the economy, specifically industry, are too weak in our sample of countries? In addition, is this relative weakness of other sectors in these economies the fault of tourism, or other factors? Structural factors, for example?
In Central Europe, Budapest, Prague, and Vienna each represent major urban tourist attractions. And unlike Bulgaria, Croatia, Greece and Montenegro, these are year-round tourist locations. The fact you cannot enjoy a swim in the Adriatic, Aegean or Black seas for as many months of the year as a Sacher Torte at the Viennese Opera or dinner at the Prague Castle is a fact of life. A structural factor.
Population denisty increases sharply over summer
Furthermore, consider the distribution of tourists in the more seasonal tourism markets of our four sample countries. In pre-pandemic 2019 Bulgaria had 9.3mn foreign tourists, Croatia 18.3mn, Greece 34mn and Montenegro 2.5mn. In other words, for every citizen of Bulgaria in 2019 there were 1.1 tourists, in Croatia 4.5, in Greece 3.4 and in Montenegro 3.8.
Not only that, but the distribution of tourists is skewed towards coastal areas. When up to 1 million tourists a week are holidaying in Croatia in peak season, we have a de facto increase in population of 25% for two months. And in the four Dalmatian counties, which attract most guests, that increase is well over 50%. Or Istria for that matter, where, for example, the town of Medulin with a population of 6,500 had over 26,000 guests in July. The numbers are even more pronounced in Montenegro, which can perhaps most starkly be seen in the regional unemployment data – in 2019 the unemployment rate was 15.5% nationally, but only 5.5% in the coastal region.
Tourism also attracts the unemployed and people from other parts of countries. In Croatia, for example, people from all over the country and from abroad work in tourism. And when a sector is successful, it attracts investment from various sources. You therefore see numerous people from Zagreb owning rental properties in Istria with the sole purpose of leveraging tourism’s potential.
Tourism as a pointer to more efficient resource allocation
This type of concentration of people puts pressure on resources. Investment in accommodation capacity takes time, meaning price has to do the heavy lifting in clearing the market. When tourism has the ability to lift an entire economy out of a rut very quickly, there is no use complaining that local citizens cannot afford to enjoy the sights of Dubrovnik in July or August. The challenges hospitality industry employers have in finding and retaining quality labour also reflect resource pressures. An issue made more challenging by the seasonal character of most tourism in our sample countries. Over the course of the past three months, I have heard anecdotal evidence of the price of hospitality industry labour being bid up in both Croatia and Montenegro. Non-resident labour is also increasingly evident, another sign of employers managing around resource constraints.
Not a year goes by without news items on the inadequacy of infrastructure, such as wastewater treatment, in coastal regions. Would these issues ever see the light of day were tourism not such a generator of income and employment? I have commented many times before that without the motorway, port and airport investments of the past 20 years, Croatia for example would not have been able to attract the more than 20mn guests it did in 2019. With that infrastructure issue largely resolved, the importance of tourism is signalling a need to focus on less visible, but similarly important infrastructure weak points such as wastewater treatment.
Can countries improve tourism and other sectors of the economy?
Tourism is a major contributor for good in Bulgaria, Croatia, Greece and Montenegro (and further afield). The sector always has the ability to rebound quickly, which we have seen again in 2021, contributing to macroeconomic stability. This should improve the prospects of a more balanced discussion on macroeconomic policy challenges facing the EU.
Indeed, as a major regional source of income and employment the sector is an important factor behind social cohesion, allowing governments to direct resources to other, less endowed parts of their countries. Also, the seasonal nature of tourism in the countries we have focussed on clearly signals where investment is needed to reduce pressure on scare resources. People often overlook such structural factors in asking why other sectors of the economy are not as important. Austria and Slovenia combine a solid industrial and services bases with very respectable tourism sectors. Far from disparaging their tourism sectors, they have invested serious funds into them and brought them to a high level. On a number of levels that sounds like something to aspire to, rather than bemoaning the side effects of tourism.