The size of the European shadow economy is nearly one-fifth of its GDP. As a result of this enormous black market governments and tax services miss out on billions of income. Nevertheless, there is also good news for governments. The size of this shadow economy has dropped to the lowest point in 10 years. This conclusion can be drawn from analysis performed by A.T. Kearney and credit card holding Visa.
The shadow economy consists of lawful company activities undertaken unattended by governmental authorities. In general, these activities fall within two categories. The first category is about undeclared labour. This category accounts for two-thirds of the shadow economy. This concerns salary which is not declared by employees or the government to avoid taxes or paper work. For example, in construction undeclared labour is a very common thing. The remaining part stems from incomplete declarations. In most cases these incomplete declarations arise when companies transferring large amounts of money (small shops, bars and taxi’s) only declare a proportion of their income in order to escape their tax responsibilities, partly.
The shadow economy is maintained by multiple factors. Nowadays paying in cash is still the most preferred method of payment. Because of this a lot of transactions are taking place without the awareness of tax services. Above all, in many cases it is lucrative to stay active in this dubious circuit. Especially when considering the lack of law enforcing measures aimed at tracing these transactions.
Size of shadow economy
The European shadow economy is value-wise estimated on 2.1 billion euro, which comes down to around 18.5% of the total economic activity. In the past 10 years the shadow economy (as a percentage of the GDP) decreased from 22.4% in 2003 to the current 18.5%.
Shadow economic trends per country
The size of the decrease in the shadow economy is primarily due to positive developments in Western Europe. In these countries the decrease has been most prominent. Especially in France, in this country the drop has even been over 10% in the last ten years.