Greece over the last fifteen years appears trapped in a growth model built on “feet of clay,” researchers say. Credit: Greek Reporter
A newly published study titled “The Café Economy” by the Hellenic Observatory at the London School of Economics (LSE) reveals an uncomfortable truth about the transformation of Greece’s economy following the bailout era.
The study, co-authored by Michalis Nikiforos, Vlassis Missos, Christos Perros, and Nikolaos Rodousakis, analyzes how Greece has morphed into a “cafe economy.” This describes the massive expansion of the Accommodation and Food Service Activities (AFSA) sector, which includes all tourism-related activities: restaurants, bars, hotels, entertainment, short-term rentals, and more.
By using the “cafe economy” label, the researchers draw attention to “the elephant in the room” that is often ignored: despite grand promises of a new “development model,” Greece appears trapped in a growth model built on “feet of clay” over the last fifteen years.
Greece: Uneven tourism growth and collapsing productivity
The researchers examined how, after years of austerity and structural reforms that liberalized labor and product markets, tourism-related activities grew disproportionately compared to other sectors. This uneven growth has been a key factor in the drastic reduction of overall economic productivity.
Instead of the promised productivity increase via the bailout reforms, the Greek economy experienced the opposite: a sharp drop in labor productivity and a significant redistribution of employment toward low-productivity sectors, particularly AFSA.
The authors argue that the main drivers of the productivity collapse were a reduction in aggregate demand and a sharp decline in real wages.
Labor productivity fell by 16 percent between 2009 and 2024 and remains below pre-crisis levels.
Real wages dropped even more steeply, falling by 26 to 35 percent overall, and by as much as 60 percent in the tourism sector.
This phenomenon signifies a violent redistribution of income against labor. The shift of employment to the AFSA sector accounts for approximately one-third of the overall decline in labor productivity. This was compounded by the loss of hundreds of thousands of jobs in productive sectors such as manufacturing and a shortfall in high-tech and innovation employment.
Historical regression to a dual model
The study explains that Greece’s development model is becoming “dual,” a form of historical regression typically characterizing less developed or transition economies. In this dual model, growth relies on low-productivity sectors that absorb unemployment through cheap labor made possible by wage compression.
The researchers conclude that the three bailouts implemented from 2010 to 2018, instead of enhancing competitiveness, triggered a deep recession from which the Greek economy has not fully recovered. They point out that even the IMF issued an apology for underestimating the negative impact of sharp fiscal contraction.
The over-educated and underpaid workforce
The LSE research highlights the dramatic changes in the AFSA workforce from 2009 to 2023:
Employment in the AFSA sector increased rapidly by 87 percent.
Gross Value Added grew by 11 percent.
The AFSA sector became the largest employer in the Greek economy, characterized by low wages and an increase in precarious or part-time work.
The workforce in tourism is more educated but underemployed, with many university graduates working in low-skilled positions. Eurostat data confirms that Greece has one of the highest rates of “overqualified” young graduates in Europe (after Spain), with over 86 percent of young graduates in tourism/hospitality employed in jobs below their qualifications.
The double-edged sword of Greece’s cafe economy
The study, “The Café Economy,” outlines both the benefits and significant drawbacks of this development path:
The positive: External balance
The tourism sector made a crucial contribution to improving the current account balance. The trade surplus in travel services improved by five percentage points between 2009 and 2023, accounting for roughly half of the total current account deficit reduction during that period.
The negative: Structural vulnerabilities
Over-reliance on tourism and a low-productivity, low-wage, labor-intensive service economy has resulted in serious structural weaknesses:
Social and environmental degradation: The disproportionate growth contributes to environmental and cultural degradation, phenomena often grouped under the label of “overtourism.”
Housing crisis: The increase in short-term rentals and foreign real estate investment is driving up rents, making them unaffordable for local workers.
Dependence: As the cafe economy swells at the expense of other sectors, dependence on external demand and its seasonal fluctuations increases, making whole regions vulnerable to changes in tourism traffic.
The researchers have warned that low wages reduce the incentive for innovation and technological progress, ultimately undermining the economy’s competitiveness.
Policy implications
The Greek experience challenges the notion that market liberalization automatically increases efficiency. The authors cautioned that greater dependence on low-productivity sectors (AFSA) creates a development dilemma whereby they support demand and foreign exchange but undermine long-term productivity and social sustainability.
“A successful path for Greece will require policies that not only restore demand but also strategically promote high-productivity sectors, support technological upgrading, and ensure inclusive growth. Without such a shift, the ‘cafe economy’ risks being not a temporary adjustment but a long-term equilibrium of stagnation,” it was stated in the study.
It urges a careful reassessment of structural reforms in light of real economic and institutional conditions, advocating for policies that prioritize inclusive, high-productivity development.