The Gray Economy: Europe's €1.5 Trillion A Year Black Hole

With Greek tax-collectors under increasing pressure to squeeze their quote out of an increasingly bombastic population, Italy's Rossi arguing for the need to fight VAT evasion, and France taxing anything and everything that moves - all in the name of austerity; it seems, as Bloomberg Brief's Niraj Shah notes today that attempts to bring burgeoning debt levels in Europe under control - by tackling the unofficial, or gray, economy - may backfire. It seems, given the large and growing (average 17.3% of euro GDP or EUR1.5tn) size of the gray economy that the more governments try to capture 'gray' externalities (or hike VATs - up from 18.1% to 20% on average), they merely succeed in pushing more transactions into the gray area. A study by Schneider of Linz University finds that focusing on the gray economy may be counter-productive as some of the activities may act as a safety net and contribute to growth - in a counter-cyclical way - serving as a cushion for people facing wage cuts and job losses. With as much as 24% of Greece's economy now estimated to be 'unofficial', the Troika-inspired 23% VAT rate is having quite the unintended consequence it seems.

From Ireland's 12.7% 'unofficial' economy to Greece's 24% of GDP, the people have found a way to survive...


... which, it would seem, drives transactions further off the grid as VAT rates rise.

... forcing Europe to scramble to find any incremental sources of tax revenue which just aren't there, in turn pushing the continent to rely on debt funding (like the US) to an ever greater degree, until finally all the sovereign funding needs are funding solely through debt.

Charts: Bloomberg Briefs