June 28, 2015 / 7:39 PM / 4 years ago

Greek tourism draws line in the sand over tax hikes

PAROS, Greece (Reuters) - Alexis Kalaitzoglou makes a swift gesture to describe what he thinks about Prime Minister Alexis Tsipras: the shopkeeper on this busy tourist island pulls his leg back and swings it forward as if to give Greece’s leader a good kicking.

Tourists make their way past a European Union flag and a Greek national flag at the seaside of the island of Paros, Greece June 26, 2015. REUTERS/Matthias Williams

Kalaitzoglou is angry because his family’s shop of jams, honeys and wooden handicrafts - part of a wider tourism industry that is the only bright spot for Greece’s struggling economy - may be in for a rough ride.

A rise in consumer taxes on the islands’ goods and services is one of the sacrifices creditors are seeking from Athens to unlock bailout funds that will allow Greece to remain in the euro. The tax hike is one of the sticking points thwarting a deal and prompting Tsipras to call a July 5 referendum on the bailout terms.

Yet even before the vote Greece is likely to default on a debt payment, setting off a financial crisis that could damage an upcoming tourist season that had been expected to be one of the most vibrant in years.

“The sea and the tourism are the backbone of our economy. If we touch that too, there is no future anymore,” said the 62-year-old Kalaitzoglou.

Creditors are demanding higher VAT rates for restaurants and other services and want an end to tax breaks for islands such as Paros. The tax breaks are intended to make resorts more attractive and shield poorer, more remote communities from the higher costs of transporting goods. Raising them would force businesses to increase their prices at the risk of driving customers away, or face a sharp drop in revenues.

Under the creditors’ proposals, for example, a 9 percent VAT rate on some food products, restaurants and catering in Paros and other islands would be raised to 23 percent. “If the VAT rises to 23 percent in all goods, we had better jump in the sea and be done with it,” says Kalaitzoglou.

OFFER MADE PUBLIC

The anger of Kalaitzoglou and others underscores Greece’s dilemma: after five years of belt-tightening in exchange for bailout money Greece now needs to promise more austerity to keep afloat financially. But that risks undermining already scant opportunities for economic growth.

And in an apparent acknowledgement of the dangers of increasing taxes on the tourist industry, Greece’s creditors on Friday offered to scrap previous demands for a higher tax rate for hotels. The European Commission made public the new offer, with the concession, on Sunday.

“We all know, the biggest importer of currency is tourism. If tourism is hurt, it will have a knock-on effect on the economy, a recessionary spiral, and then how will lenders be repaid?” said Paros hotel owner George Mbafitis.

After a fragile economic recovery last year, Greece has fallen back into recession.

One in four Greeks is out of work and an average of 59 businesses are closing daily, according to the National Confederation of Hellenic Commerce (ESEE).

But tourism - which accounts for nearly a fifth of Greek’s yearly output - has escaped the gloom. The Association of Greek Tourism Enterprises (SETE) reported a provisional 15.4 percent increase in tourists arriving through international airports last year and reckons arrivals in the first quarter of 2015 were up by 17.5 percent.

The creditors’ proposals for tax hikes emerged after a months-long tug of war with the Greek government over where to find cost cuts.

Tsipras, whose leftist coalition took power in January promising to end the “humiliation” of job and pay cuts, has been opposed to cutting pensions and wages further, leaving him having to consider taxing companies more instead to bring in extra revenue.

DODGING REAL REFORMS?

But Tsipras’s junior coalition ally threatened to pull the plug on the government if any tax hikes on islands materialized.

Critics say tax rises are a lazy way to raise revenue at the expense of real reforms to the Greek economy, such as tackling corruption and tax evasion, overhauling labor regulations and reshaping a bloated pension system.

“They don’t want to touch the privileged, which are mostly public workers, which are the customers of the political parties,” said Nicolas Stephanou, who runs a tourism web portal in Paros.

Meanwhile heightened uncertainty over whether Greece will stay in the euro zone at all is beginning to hurt the tourism business, with some companies reporting a drop in travel bookings amidst fears of possible bank runs and street protests.

On Sunday, Germany’s foreign ministry advised tourists traveling to Greece to take plenty of cash with them in case of problems with local banks.

“I had customers this morning asking me what was happening, what they should do,” said Dimitris Stavrakis, a Paros hotelier.

“This thing has gone on for too long - ‘will they sign, won’t they sign’? Now a new round of uncertainty might start with the referendum.”

Some economists argue that returning to a sharply devalued drachma - a the prospect Greece faces if it leaves the euro - could boost tourism and other service sectors by making them cheaper.

But for Stavrakis, it’s not worth the risk:

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“There are so many unanswered questions on how it would work if we did return to the drachma, what it would cost now, I’m not sure. Definitely it would make holidays cheaper but I don’t think that it is a realistic option.”

Kalaitzoglou of the jam and handicraft shop says life is already difficult enough. His wife, who works at a travel agency, has seen her salary reduced by 200 euros. And the shop, run by his daughter, could struggle.

“We can’t be wishing to buy an ice-cream for our grandchildren and start having second thoughts about it,” she said.

Additional reporting by Lefteris Karagiannopoulos and Lefteris Papadimas; Editing by Alessandra Galloni, Janet McBride and Greg Mahlich

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