Europe's Shadow Economies a Boon in Crisis

Greece holds the record for the developed world's most crooked economy: with fully one quarter of its GDP earned off the books in illegal construction and unreported employment, Greece could easily have avoided its debt crisis had it found a way to tax even half of that income. But the shadow economy is far more widespread in the West than a few corrupt Mediterranean nations. Germany and Scandinavia, for example, have huge shadow economies that are only 30 percent smaller than Europe's south. "That's a much smaller difference than cultural stereotypes would suggest," says Lars Feld, coauthor of a recent survey of the world's underground economies. The reason: in the north, burdensome taxes and heavy regulation drive millions to supplement incomes under the table. The one virtuous economy, at least in this respect, is the U.S., where shadow activity accounts for only 7.8 percent of GDP.

Now Europe's underground economy is growing again after a decade-long decline, according to a new report by Friedrich Schneider of Austria's Linz University. But that may not be a bad thing. Contrary to received wisdom, only a small portion of EU shadow economies are linked to crime; some 85 percent of the work is legal, just off the books. In a downturn, this kind of moonlighting is a fast way for the jobless or underemployed to top up their incomes. What's more, most black-market workers quickly recycle their earnings into consumption in the official economy, where they generate taxes again. Two thirds of all GDP generated in the shadows would never be produced in the official economy, either because taxes are too high or regulations too cumbersome. Without a shadow economy filling the slack, most EU nations would be far worse off in the crisis.