Tourists visit the Parthenon. Greek tourism, as a key pillar of the economy, remains highly vulnerable to geopolitical crises and rising travel costs, which can affect demand and revenues. [AP]
The crisis in Iran and the wider Middle East is expected to have long-term consequences in both the geopolitical and economic spheres. At a first level, it will strongly affect three parameters of the world economy, which are very important for the Greek one as well: tourism and income, energy costs, and the level of interest rates. At a deeper level, it is sharply increasing uncertainty in the markets and overturns norms and roles in the global economy.
The Greek economy, by its nature and structure, is very exposed to changes in the level and characteristics of inbound tourism, which continues to support a large part of the gross domestic product. In view of the summer season, if the current ceasefire between the United States, Israel and Iran develops into an agreement to end military operations, the damage will be limited and will come less from the reluctance of tourists to travel to the region and more from the reduction in the incomes of foreign households and the increased cost of travel. If the cost of air travel increases significantly, Greece will be at a disadvantage compared to other European destinations that are closer to major markets. There is also the possibility that visitors who would otherwise head to countries directly involved in the crisis or travel through them will choose our country.
The Greek economy also remains vulnerable to increases in energy prices, as they directly burden imports, especially oil and gas, and the current account. In the main scenario, where the military attacks stop, these prices will decline from current levels, but will remain for months higher than they were before the war. As a result, an increase in inflation and a decrease in the real growth rate are expected in Europe and in our country. The extent to which this will happen will also depend on the response of monetary and fiscal policy.
If, however, the war in the region continues, resulting in new difficulties in supply and further reduction in market visibility, the blow will be manifold. As the productive base in Greece remains weaker than desired, there will be a sharp increase in inflation. High inflation will reduce the burden of public debt – a notable development – but it will burden the economy by eroding competitiveness and the people’s real incomes.
As Greece has a large accumulated investment gap and needs to consolidate stability through productive investments, the economy may also be affected by an increase in financing costs. Interest rates and the cost of money are already rising in global markets. Our economy is affected, on the one hand, by the debt that needs to be financed – a development that is already recorded in associated interest rates – and on the other, on the issue of new productive investments. Increased global uncertainty always tends to direct capital and investments to safer destinations. Therefore, it is crucial that domestic economic policy is characterized by stability, supports growth prospects and exploits its links with European priorities.
It is logical to expect that a decline in tourism in our region, an increase in energy costs and a deterioration in financing conditions will lower the prospects of our economy this year, as well as the rest of the eurozone. The related impact under alternative scenarios has been estimated in a report that was just published by the Foundation for Economic and Industrial Research (IOBE). We can also seek ways to mitigate costs and help the public sector, businesses and households adapt to the new challenges.
However, apart from such first lines of defense, a deeper reading of developments could lay the ground for new roles and rules. Issues concerning role reallocation are always difficult, and do not come without cost and uncertainty. The first is the question of what the end to this stage of the crisis in the Middle East will signify for the credibility of US policies and, consequently, for anything that depends on the robustness and hegemony of the American economy in global markets, which has been a dominant feature for decades.
A related second issue concerns the course of international markets and whether the expectation of future profitability will continue to cover the costs caused by the current disruptions. The third issue, of key importance for us as well, is the direction of the European Union. Today, it maintains a cautious and even defensive stance toward new developments, despite the urgent need to strengthen internally and dynamically assert its role in technology, the markets and diplomacy.
Therefore, apart from assessing the most obvious and immediate effects on the Greek economy this year, a deeper analysis of such a complex crisis will allow for a better adaptation to a new local and global economy.
Nikos Vettas is the general director of the Foundation for Economic and Industrial Research (IOBE), and a professor at Athens University of economics and business.