Will Shadow Economies Darken the Future of Europe?

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Shadow markets have come to represent more than 18 percent of the economic activity in the eurozone, according to a new study by Spanish officials. This is in line with previous independent assessments conducted by experts and economists over the past few years, The Corner reports.

Compounding the problem of economic stagnancy for governments in the euro area, the shadow economy poses a serious threat to government funding and possibly to the future economic stability of the region, as well. With off-the-books transactions accounting for more than a quarter of activity in many southern European countries — hitting 29 percent in Spain, according to the study — it’s no wonder that governments are having a tough time collecting enough revenues to pay their ever-increasing bills.

While the traditional concept of a shadow economy is embedded in the notion of organized crime, it’s not just the mafia that is doing business under the table these days. With VAT rates soaring in addition to corporate and income taxes, many businesses are deciding to cut the government out of the equation entirely, The Corner says. Some businesses apparently decide to dramatically under-report their income streams, effectively paying taxes on only a small part of their operations.

This is not to mention illegal industries that have thrived in the businesses of tobacco, prostitution, fake designer products, and illegal substances.

Several options exist for European governments to fight back against the shadow economy, European CEO writes. A simple but surprisingly effective measure is to remove cash from circulation — especially by cutting back on the amount of large denominations of bills, it makes it much harder for the shadow economy to conduct business. With credit card-based transactions almost always being accounted for and reported to the government, initiatives to widen the ability of electronic payment options are one way to increase the amount of transactions that the government sees.

However, this has a limited impact, because curtailing cash flows can only go so far: It is clearly impossible to get rid of physical currency entirely, at least at the moment. Deploying additional personnel to target organized crime syndicates is useful in stemming the bleeding, though it has proven largely ineffective in stopping the problem at the source. A third option could be the legalization of substances such as marijuana, hoping to bring the drug trade out into the open, where it can be taxed.

Felix Moreno, a Spanish trader, spoke with RT about the problem facing the Spanish economy. He said that in a time in which 50 percent of a minimum wage earner’s salary is taken by the government in taxes, it’s not hard to understand why going rogue is so appealing. Especially with unemployment so high — it remains above 26 percent in Spain — the shadow economy also provides work for thousands.

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