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7th Dec 2019

Recession spurs growth in EU 'shadow economy'

While just about every part of Europe's economy is shrinking in the current recession, one sector - the black market - has started to grow, according to fresh research in Austria.

The "shadow economy" - which includes untaxed trade in goods and services, such as cash-in-hand construction work or car repairs, but excludes serious crime such as illegal drugs and prostitution - is predicted to expand by 0.3 to 0.9 percent this year in 14 rich EU states, which are also members of the OECD.

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  • A shoe-repair store: the cash-in-hand sector is growing even as the rest of the economy shrinks (Photo: Joseph Smith)

The highest growth in the sector - of 0.8 to 0.9 percent - is to come in Ireland, the UK and Spain. Belgium, Austria and Germany meanwhile are at the lower end of the scale.

Growth in the former Communist EU states, not covered by the forecast, an analysis by economist Friedrich Schneider of the Johannes Kepler University in Linz, is likely to be "the same if not bigger."

The turnaround comes after 15 years of decline in black market activity and occurs at a time when the legitimate EU economy is expected to contract by two percent.

The research gathers together motivating factors such as rising taxation, unemployment and mistrust in the state as well as direct indices such as demand for cash from banks and trends in the use of electricity.

"In Belgium, if you go out on the weekend, you see more construction work being done than during the week," Mr Schneider told EUobserver, explaining that the vast majority of shadow work is carried out by people who also hold licit jobs.

The economics of serious crime is different however. Rising taxes are unlikely to have an impact on sales of illegal drugs. Theft and burglary may go up during a recession. At the same time, income from prostitution is likely to go down, as businessmen have less money to spend.

The size of the shadow economy varies from region to region. In northern Europe and Scandinavia it represents between 10 and 18 percent of official GDP. In Mediterranean countries such as Portugal and Italy, the sector makes up 20 to 25 percent.

Many former Communist EU countries have shadow sectors in the Mediterranean range. But in Estonia, Latvia, Romania and Bulgaria the estimate clocks in at 36 to 39 percent.

The figures for EU neighbours can be much higher. In Belarus and Moldova, around half of economic activity bypasses the state. In Ukraine, about 57 percent. In Georgia, 68 percent.

The existence of a shadow economy up to the 25 percent mark can improve ordinary people's quality of life, the Austrian academic believes.

"The shadow economy tends to increase people's well-being. Extra goods are produced, extra income is generated. You don't work in the shadow economy for the sake of your savings account, but because you want to buy a new TV or whatever," Mr Schneider said.

A thriving black market can also be useful in other ways. In 2006, the Greek government included the size of its hefty shadow economy in the calculation of its official GDP to try to avoid EU fiscal disciplinary measures.

The EU's stability and growth pact limits the size of government borrowing to three percent of GDP.

The European Commission rejected the Greek manoeuvre. But the commission itself in recent years has contacted experts such as Mr Schneider to see if shadow economy estimates could be used to inflate the official wealth of member states.

"The commission has also had this idea because it would enlarge the base from which they calculate contributions to the EU budget. So they are not so hostile," the Austrian economist said.

"But there is no consensus on how to estimate the size."

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