LSE study finds post-bailout Greece turned into a cafe economy

A new study prepared by the Hellenic Observatory at the London School of Economics (LSE) has examined the structural transformation of the Greek economy following the bailout era.

According to reporting by the Greek Reporter, the study titled “The Café Economy”, authored by Michalis Nikiforos, Vlassis Missos, Christos Perros, and Nikolaos Rodousakis, revealed that the country has become excessively dependent on Accommodation and Food Service Activities (AFSA), a sector encompassing all tourism-related fields including restaurants, bars, hotels, entertainment, and short-term rentals.

The researchers pointed to a fundamental issue that is often overlooked behind the “café economy” characterisation. According to the study, despite promises of a new “development model”, Greece has over the last 15 years remained trapped in a growth cycle built on an exceptionally fragile foundation.

Labour productivity declined as tourism expanded

The study reported that following austerity policies and structural reforms that liberalised labour and product markets, tourism-linked activities expanded disproportionately compared to other sectors. This unbalanced growth became one of the primary drivers of the economy’s broader loss of productivity.

Contrary to the productivity gains promised by bailout reforms, an opposite trend took hold across the Greek economy. While labour productivity suffered a steep decline, employment shifted toward low-productivity sectors, led by accommodation and food services.

The researchers identified the contraction in aggregate demand and the sharp erosion of real wages as the main causes of this productivity collapse. Between 2009 and 2024, labour productivity fell by 16% and remained below pre-crisis levels.

The slide in real wages was even more pronounced. Across the country, real wages dropped by between 26% and 35%, while losses in the tourism sector reached as high as 60%. The authors described this outcome as a severe process of income redistribution operating against labour.

The shift of employment toward the AFSA sector accounted for approximately one-third of the total decline in labour productivity. The loss of hundreds of thousands of jobs in productive sectors such as manufacturing, alongside the scarcity of employment in high-technology and innovation fields, deepened this decline.

Greece enters regression under a dual model

According to the study, Greece’s development model is displaying a historical regression by evolving into a “dual” structure typically observed in underdeveloped or transition economies. In this model, economic growth relies on deploying labour, cheapened through wage suppression, into low-productivity sectors.

Noting that the three bailout programmes implemented between 2010 and 2018 triggered a deep recession instead of boosting competitiveness, the researchers stated that the Greek economy has never fully emerged from this slump.

The study also recalled that the International Monetary Fund (IMF) had in the past apologised for underestimating the negative impacts of severe fiscal contraction.

Educated young population works in low-wage jobs

Data published by the LSE showed that the workforce in the AFSA sector underwent a fundamental transformation between 2009 and 2023:

Employment in the sector surged by 87%. Gross Value Added recorded 11% growth. AFSA became the largest employer in the Greek economy.

On the other hand, the sector is characterised by low wages, precarious working conditions, and an increase in part-time work. Although the educational attainment of tourism employees has risen, workers are increasingly employed below their qualifications.

Eurostat figures confirm that Greece, behind Spain, has one of the highest rates in Europe of young graduates who are overqualified yet employed in unskilled jobs.

More than 86% of young university graduates working in the tourism and hospitality sector are employed below their qualification levels.

Structural risks deepen while external balance improves

The report titled “The Café Economy” listed the advantages along with the severe vulnerabilities generated by this development path:

The positive effect emerged in the external balance. The tourism sector provided a significant contribution to correcting the current account balance. The trade surplus in travel services rose by five percentage points between 2009 and 2023, covering approximately half of the total current account deficit contraction over the same period.

Conversely, overreliance on tourism and a low-productivity, low-wage, labour-intensive services economy brought heavy structural weaknesses:

Social and environmental degradation: The disproportionate growth of the sector lays the ground for environmental and cultural deterioration, frequently described through the concept of “overtourism”.

Housing crisis: The proliferation of short-term rentals and foreign property acquisitions drives up rents, making housing costs unaffordable for local workers.

External dependence: As the café economy expands at the expense of other sectors, reliance on external demand and seasonal fluctuations multiplies; entire regions remain exposed to shifts in tourist flows.

The researchers warned that low-wage policies erode economic competitiveness over the long term by weakening incentives for technological innovation and progress.

Noting that the thesis claiming market liberalisation automatically delivers productivity has been undermined by the Greek experience, the study stated that dependence on low-productivity sectors such as AFSA creates an economic dilemma. Even if these activities support demand and foreign currency inflows, they damage long-term productivity and social sustainability.

The report noted: “A successful way out for Greece requires policies that do not merely stimulate demand, but also strategically promote high-productivity sectors, support technological upgrading, and ensure inclusive growth. Without such a change of course, the ‘café economy’ risks becoming not a temporary adjustment process, but a long-term stagnation equilibrium.”

The study concluded with a call to re-evaluate structural reforms in light of real economic and institutional conditions, and to prioritise development focused on high productivity.