Will Euro Austerity Push the Shadow Economy Even Deeper Into the Dark?

Photographer: Angelos Tzortzinis/Bloomberg

Taxi drivers in central Athens, Greece Many had paid tens of thousands of euros for black-market licenses.

In a detailed article today from Bloomberg’s Oliver Staley about the worsening depression in Greece, there’s a short story that should be required reading for any European policy maker. It’s that of a 52-year-old teacher who, having seen her monthly wages cut from 1,200 to 800 euros, got hit with a new 420-euro property tax charge on her electric bill.

The teacher couldn’t afford the tax. So she stopped paying her electric bill, and banded together with neighbors to illegally tap into a power line. The net result: no tax for the government, no more payment for electricity and likely an unreliable, unsafe source of power to boot.

This encapsulated the trouble with many of the austerity plans being mooted in Europe. The debate in Europe is like a mirror image of that in the United States, not “which tax cuts should we keep?” but “what new taxes can we think of?” At Bloomberg today alone, you’ll find stories about new taxes on wine in Ireland and beer in France.

Above, a chart from the European Commission’s “Europe 2020” economic report, showing the size of the unregulated, untaxed “shadow economies” in the euro zone. The danger of many of the austerity measures getting passed is that they will push economic activity into the shadow economy as it did with the teacher in Greece. On top of that, cuts in state benefits further diminish economic activity.

In Italy and Greece more than 20 percent of the economy is in the shadow zone; it’s 19 percent in Spain. A long term solution to those countries’ debt problem will need to bring more of the economy into the light.

That is a goal of some of the changes — like liberalizing Greece and Spain’s restrictive labor and licensing laws — that European leaders have wanted to push through. Greek and Spanish voters elected governments who’s promised to do that. Unfortunately, the extractive approach to austerity may be turning those same voters against the whole project of economic reform.

A version of this post appeared earlier in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.

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