Impact of euro depreciation on tourism in Europe

Eurozone countries contain the leading tourist destinations worldwide and should benefit from the euro’s depreciation. This effect could, on our rough estimates, add 0.2 points to the Eurozone’s GDP

August is approaching. Well-deserved holidays await the writers of this note and their regular readers. Before shutting up shop, a rapid analysis of tourism in Europe is in order, we believe, particularly since, with the euro at its lowest levels since 2003, the sector could well benefit from a distinctive support this year. Americans, Chinese, Middle Easterners have greater purchasing power.

Given the sector’s fragmentation and a penchant for the informal economy (undeclared labour, holiday accommodation exchange platforms), we must abandon the notion of extremely accurate statistics. However, various bodies (WTTC, World Bank, Eurostat) provide data which help evaluate the sector’s weight in the various Eurozone countries.

Let us start with a brief overview of European countries’ specific situations.

• France is the top-ranked country in terms of the number of foreign tourists (85 million in 2013 vs 70 million for the US) but this figure is slightly misleading as around 15 million of these visitors are in transit, essentially towards Spain. Moreover, tourism in France takes two very different forms. First, there is Paris and the Greater Paris region. Here, stays are longer and foreign tourists spend more than elsewhere in France. Two-thirds of non-European tourists head for Paris compared with one-third of European tourists and a quarter of French tourists. Second, there is the lower-margin regional tourism characterised by shorter stays. All told, the sector’s contribution to GDP is slightly lower than the Eurozone average.
• Spain benefits more from tourism than France. According to the World Travel & Tourism Council, tourism spending in Spain totalled € 52bn in 2014 vs € 46bn for France and this advantage has averaged c.12% over the past decade. When tourists go to Spain, their average stay is longer than in France. According to Eurostat, there are 2.6 times more hotel nights by tourists in Spanish hotels than in French hotels. Tourism is a pillar of Spain’s economy accounting for close to 15% of GDP and exports.
• Italy, il bel paese, offers all possible forms of tourism (seaside resorts, history and culture, religion, gastronomy). The sector’s weight corresponds to the European average. The number of tourists’ hotel nights is midway between France and Spain.
• In Germany, tourism was for a long time primarily a domestic affair, with German tourists benefiting from strong purchasing power. As of the start of the 1990s, the sector made a stronger contribution to GDP than France. Foreign tourists were a rarer commodity but this situation changed dramatically after reunification, the opening up to the East and adoption of the euro. Tourism in Germany has chalked up one of the briskest rates of growth in Europe in recent years (chart lhs).
• In Greece and Portugal, two small economies, which hardly benefit from domestic tourism, foreign tourism plays a vital role for the economy. The sector accounts for around 20% of Portugal’s exports and 25% of Greece’s. The weight in GDP is weaker as the imports needed to meet this demand must be deducted. This weight of tourism is also reflected in foreigners’ share of hotel nights: 70% in Portugal and 80% Greece, vs just 30% in France.

Having shown how tourism holds a prize place in economic activity in the Eurozone, it is legitimate to wonder what the positive impact of the euro’s depreciation is on this sector and on economic growth overall. Given the tourism industry’s structure (marked prevalence of domestic costs, general absence of forex hedging, etc.), the sharp depreciation of the euro in H2 2014 will normally have a positive effect. All other things being equal, the Americans and Chinese are more likely to come in greater numbers to Europe whilst Europeans are less likely to leave their continent (without forgetting that tourism in North Africa is being hit by the insecurity sparked by terrorist attacks).

How to quantify this effect? First, we must calculate the share of tourists coming from outside the Eurozone. In France, their share of total hotel nights in 2014 was 19%, in Germany 33%, Greece 28%, Spain around one-third and in Italy 40%. At the European level, a ratio of 30% of non-European French tourists appears plausible as does a ratio of 40% of total spending (assuming that these visitors, coming from further away, stay for longer periods than their European counterparts). It is on this share that a weaker euro can have the most visible impact. Let us attempt a “heroic” estimate. Bearing in mind that the euro has lost around 16% vs the dollar compared with 2014 and assuming that foreign tourism spending remains stable in their local currencies, this implies a rise of 6% in foreign tourist spending (40%*16%). Tourism’s share in exports is, on average, 7.6% and the share of exports in GDP is around 40%, implying an impact of +0.2% (+6%*7.6%*40%) on GDP. The final impact could even be slightly higher assuming Europeans are encouraged to stay in Europe rather than go further afield for their holidays. This magnitude appears fairly consistent with changes in the US trade balance on travel, depending on the dollar’s exchange-rate fluctuations (chart rhs). Tourism is more than a story of exchange rate, but in 2015, this factor is undeniably a driver for the sector and, more broadly for economic activity in the Eurozone.