Underground Economy And Wasted Potential

Imagine a world in which up to one half of a country’s gross domestic product (GDP) was not taxed. Imagine capitalist investors and heads of companies escaping the long-handed reach of state coffers, thereby avoiding their due contribution of hundreds of millions of dollars to the very citizenry that helped create their wealth to begin with. Unfortunately, this world is not at all different from the one we live in. Every year, wealthy businessmen around the world send their fortunes to (legal) tax havens like Switzerland and the Cayman Islands, resulting in the exclusion of that revenue from the GDP calculation of their native countries. As unreported revenue, it is untaxed revenue. The common name given to this phenomenon is the “shadow economy.” Foreign Policy published an article late last week with information regarding six countries with especially large shadow economies as compared to the recorded size of their “white,” or above ground, economies. While the uninitiated might consider issues such as these issues of a regulatory nature and therefore problems endemic to third-world or failed states, the fact is that many so-called “developed” nations top the charts in terms of shadow economy size. It is primarily Western businessmen who generate enough funds to make hiding them abroad or in various accounts worthwhile.

Among these Western economies that suffer the effects of large shadow economies are some headlining countries of the European Union: The article hyperlinked above mentions Italy, Greece, and Ireland as among some of the most salient examples of rampantly growing shadow economies. In a time when sovereign governments are struggling to make ends meet and to fund their domestic programs during forced austerity measures, the Union must ask itself if it is prepared to take the necessary steps to tighten regulations and to take advantage of resources that are already present.

It would be wise to point out, however, that shadow economies are not always the enemy. According to the Financial Times, countries with large shadow economies during the economic downturn saw less severe economic contractions. Also, they can provide valuable resources for start-ups and lending support for individuals who might not be able to find the opportunities they need under restrictive governments, as is the situation in China, where a famous informal lender was recently sentenced to death.

The countries of the EU, however, currently find themselves in a different situation. They have all taken an enormous risk in uniting themselves under a common currency, and a failure of the eurozone would hurt all of them significantly. Desperate times call for desperate measures, and it is high time that the member states utilize their connection to fight a problem that, despite their diversity, is common to all of them, and that affects all of them. The EU must act in unison to make hiding money difficult within all her boundaries. The price for not acting may be dissolution of the Union itself.