"'Europe's Sick Man → Economic Top Performer'... Southern Europe's Secret: Painful Austerity and Structural Reforms"

Greek Corporate Tax Cut and Spanish Labor and Fiscal Reforms
Portugal Increases Startups to Discover Future Growth Engines
"Southern Europe 'Rebirth'... Lessons Must Be Learned"

The three Southern European countries of Greece, Spain, and Portugal, once labeled as the "sick men of Europe," have transformed into "economic role models" by leading the European economy with high economic growth rates, thanks to austerity and structural reforms. These Southern European countries lowered their corporate tax rates from 29% to 22%, a 7 percentage point reduction, and implemented labor and fiscal reforms. They actively encouraged startup creation to discover future growth engines.

In the business community, there is advice that the bold austerity and structural reforms undertaken by the three Southern European countries to strengthen their economic structures should serve as a lesson.

Greek Prime Minister Kyriakos Mitsotakis is delivering a speech at the 79th United Nations General Assembly held at the UN Headquarters in New York, USA, on September 26 (local time). Photo by Reuters Yonhap News

According to an analysis of the policies and economic performance of the three Southern European countries over the past decade, released by the Korea Economic Association on the 12th, the average economic growth rate of these three countries over the past three years was higher than the average growth rate of the European Union (EU) as a whole. The key to this success was austerity policies and market-friendly structural reforms. According to the World Bank, the average EU economic growth rate from 2021 to 2023 was 3.33%, while the average growth rate of the three countries was 5.06%. Greece recorded 5.33%, Spain 4.90%, and Portugal 4.93%.

Greece, which went as far as a national default in 2012, was selected as the "OECD Country of the Year 2023" by the British weekly magazine The Economist. It eliminated populist policies such as free healthcare and education, pension increases, and public servant expansions implemented during the 1980s and 1990s. When Prime Minister Kyriakos Mitsotakis of the New Democracy party took office in 2019, he implemented austerity policies following EU recommendations and pursued market-friendly reforms such as tax cuts and improvements to the investment environment.

At the time of Prime Minister Mitsotakis's inauguration, the corporate tax rate was 29%, which was gradually reduced to 22%, a 7 percentage point decrease. He worked to create a business-friendly environment by revising investment and labor-related regulations. As a result of these reforms, Greece succeeded in both economic growth and fiscal soundness recovery. It recorded an average economic growth rate of 5.06% over three years, and the national debt-to-GDP ratio, which had exceeded 200%, fell to 168.8% last year, marking the lowest level in 11 years. Greece's external credit rating improved from "non-investment grade" in 2010 to Standard & Poor's (S&P) "investment grade" after 13 years. The New Democracy party was re-elected last year.

Spain carried out comprehensive high-intensity structural reforms in labor, pensions, and fiscal policy. Its growth rate reached 6.4% in 2021 and 5.8% in 2022. The secret was the structural reforms initiated in 2011 and active support policies for attracting investment. Spain increased labor market flexibility through labor reforms such as simplifying dismissal conditions and introducing short-term contract work. It transformed its economic structure by reducing public investment and stabilizing local government finances. Spain attracted foreign investment through the "Golden Visa" investment immigration system, tax support for foreign investors, and startup promotion.

Spain's current account, which had suffered chronic deficits, turned to a surplus starting in 2012. Foreign direct investment (FDI) also increased by 169% in 2021 compared to the previous year, reaching $38.31 billion (approximately 53.45 trillion KRW). As a result of continuously attracting FDI, Spain created 42,450 jobs through FDI last year, ranking second in Europe.

Portugal, like Spain, implemented comprehensive structural reforms in labor, taxation, and the public sector since 2011. Most notably, it launched the national startup support program "Startup Portugal." It attempted to attract foreign investment through pro-immigration policies and implemented the Golden Visa system granting permanent residency to foreign investors, as well as tax benefits for foreign skilled workers.

As a result of these reforms, Portugal's economic growth rate, which was -4.1% in 2012, turned positive from 2015 onward. In 2022, it recorded 6.8%, one of the highest levels among EU member states. Particularly, the number of startups nearly doubled from 2,193 in 2016 to 4,073 last year. Portugal has produced numerous unicorn companies (unlisted companies valued at over $1 billion).

Kim Bong-man, head of the International Headquarters at the Korea Economic Association, said, "In addition to external factors such as the recovery of tourism, the growth of Southern European countries was mainly due to austerity fiscal policies and proactive efforts to improve market-friendly structures, including active investment attraction." He added, "It is necessary to observe how the three Southern European countries will address their structural vulnerabilities from a long-term perspective."