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Jul 20, 2012 | 10:30 GMT

6 mins read

Outlook for Southern Europe's Tourism Sector

Tourists visit the Parthenon on the Athenian Acropolis in Greece in February.
Oli Scarff/Getty Images

Tourism has been one of the few areas providing economic relief to southern European countries, particularly Spain, Greece and Portugal, the three eurozone members with the highest unemployment rates. In 2012, the number of foreign visitors to Spain and Portugal will likely remain stable, although domestic tourism in those countries will likely decline. The picture is bleaker in Greece, the European state most dependent on tourism, as political instability and recurrent violence has made the country a less attractive destination for tourists.

Overall, the European economic crisis so far has had only a limited impact on Europe's tourism sector. According to Eurostat, the number of holiday trips taken by EU residents has remained stable over the past four years. Indeed, EU resident spending on holidays grew in 2011. But such trips have become shorter on average, and domestic tourism has slowly been replacing international travel.

In 2011, Spain, Portugal and Greece benefited somewhat from travelers avoiding political instability in popular tourism destinations such as Egypt and Tunisia. However, the prospects for 2012 are less promising. A deteriorating economic environment in southern Europe has reduced domestic tourism. Tax hikes — especially value-added taxes — are increasing prices and making the region less attractive to foreign tourists. Potential visitors are also being deterred by transportation disruptions caused by protests and strikes, as well as social unrest and violence (particularly in Greece).

Given these conditions, the summer tourism season in Spain and Portugal will be relatively less robust than in 2011. The decline in tourism will be even more pronounced in Greece. This will have economic consequences, as all tourism-related activities will see revenue reductions, and social effects, as the tourism sector will create fewer jobs. As a result, the summer season will bring little relief to the unemployment crises in all three countries.

Spain

Spain is the fourth-largest tourist destination in the world and the second-largest in Europe behind France, so tourism is key to the Spanish economy. Altogether, tourism accounts for about 10 percent of the country's gross domestic product. The sector is particularly important in terms of employment. It is the only area of the Spanish economy that expanded employment opportunities in 2011, and it creates temporary jobs, which are especially attractive for jobless youths (more than half of Spaniards under the age of 24 lack employment).

Tourism has been the only sector to maintain growth despite the European crisis. After the number of foreign tourists dropped substantially in 2008 and 2009, Spain's tourism sector rebounded in the past two years. Domestic tourism, on the other hand, has declined sharply since the crisis' beginning. This has increased Spain's dependence on foreign tourism to sustain the sector. In this respect, 2011 was a strong year for Spain, as the political crises in North Africa spurred prospective visitors to the region to look elsewhere.

However, Exceltur, the Spanish federation of tourism operators, expects the tourism sector to contract slightly in 2012. There are three reasons for this: First, the crisis in Europe is reducing the number of tourists from other European countries. Second, Madrid's recent decision to raise airport taxes and its value-added tax has increased the cost of visiting. Furthermore, the deterioration of the Spanish economy will likely continue to harm domestic tourism.  

In April, a key month for the industry, Spain received 4.5 million fewer foreign tourists than in April 2011. The latest available data (from May) shows a more recent recovery in the number of foreign visitors, but domestic tourism is still weak. As a result, revenues generated by tourism will likely be reduced, jeopardizing some 19,000 jobs.

Portugal

While Portugal is only the 13th-most popular destination in Europe, tourism accounts for 10 percent of the country's GDP. The sector suffered a significant contraction in 2008 but has since recovered.

As in Spain, domestic tourism in Portugal has declined due to the economic crisis, making the country increasingly dependent on foreign visitors — particularly Spaniards, which makes the Portuguese tourism sector vulnerable to the Spanish crisis as well. Portugal is still receiving large numbers of tourists from other countries, including the United Kingdom, the United States and Brazil, primarily by offering costly discounts and specials. Thus far, this strategy has had a positive impact. The number of foreign tourists staying in Portuguese hotels rose to 7.44 million in 2011, surpassing the previous record of 7.19 million in 2010. 

However, more tourists does not necessarily translate into higher revenues. Indeed, Portuguese tourism revenues have remained relatively flat over the past four years. According to Portugal's National Statistics Institute, the number of foreign tourists in Portuguese hotels rose about 3 percent year-over-year in the first five months of 2012, but overall revenues dropped 3.8 percent as locals reduced hotel stays. The total number of visitors staying in hotels, including local travelers, fell 3 percent in the period from January to May.

Overall, tourism in Portugal is likely to remain stable or experience a small contraction in 2012. Thus, the sector is unlikely to create a significant number of new jobs this year. Nearly 40 percent of Portuguese youths under the age of 24 are unemployed.

Greece

Tourism is perhaps most important for Greece, where the sector accounts for nearly 15 percent of GDP and one-fifth of all Greek jobs. Like Spain, Greece also benefited from the North African instability in 2011. The lifting of visa restrictions for non-EU citizens from Turkey, China and India, as well as the shortening of visa-approval times for Russians, helped attract tourists last year. However, a decline in tourism is expected in 2012.

In a May 25 report, the Bank of Greece said that payments for goods and services by tourists from Germany and the United Kingdom — Greece's largest sources of visitors — fell in the first quarter of 2012. Moreover, the number of visitors to Greece dropped by 11.7 percent.

The European economic crisis has played a part in this decline, but foreign tourists have also stayed away due to Greek political and social instability. For example, Greek tourism workers, including hotel and restaurant employees, held a 24-hour anti-austerity strike June 27 to protest wage cuts, and they have threatened to hold additional demonstrations in the near future. The Greek government announced that it would reduce taxes for hotels and restaurants, but these measures have yet to be discussed with Greece's foreign creditors.

The social unrest has significantly reduced tourism to Athens, while recurring transportation strikes have hurt tourism to the Greek islands. Tensions in the country escalated particularly in the months prior to the general elections in May and June, but protests and violence have become regular features of Greek life and likely will continue.

The tourism industry's importance to Greece is enhanced by the possibility that it could benefit more than other sector from an eventual Greek eurozone exit. In principle, a cheaper currency would increase the purchasing power of foreign tourists in Greece, making the country more attractive. In reality, the effect will likely be more complicated since tourism relies on imports such as energy, which would increase prices. Moreover, an eventual outbreak of inflation could also push up costs and make Greece's tourism sector — and the Greek economy in general — less competitive.

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