Put a light on Europe's shadow economy

Anyone looking for a way to help Europe reverse its shrinking economy – and thus save the global economy – might first note some odd behavior in the Greek city of Larissa.

In a report last June, three American researchers found Larissa not only ranks as one of the districts with the highest tax evasion in Greece, it also has the highest density of Porsche luxury cars in all of Europe.

Larissa’s not-so-hidden wealth reveals a sizable hidden economy in Greece – one that remains largely untaxed. And, oh by the way, the low tax revenue happens to be a big reason why Greece’s debt is dragging down the other 16 nations in the eurozone.

The same study found nearly a third of the Greek deficit can be traced to tax evasion and corruption. Greeks, at least until recently, were earning nearly double what they report. And in a telling correlation, occupations with the highest tax evasion – such as engineers, private tutors, accountants, and lawyers – were also highly represented by members of Parliament.

This spring, the eurozone entered a recession, adding urgency to the pressure on Greece to restore its fiscal coffers by beefing up its tax collection. The best way to do that is to bring its shadow economy – estimated at 28 percent of the total economy – into the light of legal commerce.

Thus, Europe’s attempt at economic unity may depend on how quickly Greeks tackle the most common reasons for tax evasion:

1. Religious and cultural values.

2. Trust in government and the tax system.

3. Ease of evasion.

Tax morale largely depends on tax morality. But too many Greeks don’t see the connection between small illegal acts in their cash-only, tax-evading black market and the effects on the rest of the world. Or as former Deputy Prime Minister Theodoros Pangalos put it: “A lot who steal a little do a greater damage than a little who steal a lot.”

European leaders know that Greece isn’t the only euro country in need of curbing its “informal” economy. Italy’s maze of regulations on businesses helps explain why its shadow economy is 18 percent  to 21 percent of gross domestic product. Italian Prime Minister Mario Monti is trying hard to reduce these off-the-books activities. (In the United States, the estimate is 8 percent to 9 percent.)

Greece knows its ability to show lenders it can right its capsized ship depends more on boosting tax revenues than slashing budgets. “There is a lot of ‘fat’ in tax evasion and we can’t keep cutting spending,” says Deputy Finance Minister George Mavragiannis.

Greece recently tried to crack down on tax dodgers and even offered an amnesty on fines. But the efforts largely failed. The best routes are reforms that curb the shadow economy: lower tax rates, privatization of government enterprises, deregulation, and less early retirement.

For now, however, the deputy finance minister has called on the heads of each Greek tax office to “give their lives to save the homeland” by nabbing tax evaders. Or, he might have added, to also save the eurozone.