Spain’s illicit economy—all that is unaccounted for because it’s illegal or unreported—is worth an unseemly 20% of the country’s GDP, according to a new report by Spain’s Foundation for Financial Studies (FEF). That’s higher than every other country in the European Union except Italy, with 21%.
Illicit activity, while technically illegal, doesn’t necessarily mean drug-related or violent. Much of Spain’s unreported business is due to labor law and tax circumvention, which varies widely from industry to industry. Some sectors are relatively clean, like Spain’s financial industry, where the rate of illegal activity is believed to hover below 10%; others are ridden with messy, unreported business, like the country’s construction industry—Spain’s most flagrant offender—whose rate clocks in at 35%.
The effects of such a massive, underground economy are substantial—for example, more than a million Spaniards are believed to be employed by the country’s unreported economy, and thus, unemployed by the country’s official economy. Spain’s unemployment has ballooned since the onset of the euro zone crisis, but many of those reportedly unemployed may simply be earning their money informally. As much as $26 billion dollars in taxes are also being withheld from tax authorities—money that the government especially needs now amidst an acute financial squeeze. But what’s perhaps most detrimental about the country’s enormous illicit economy is its ability to skew Spain’s economic data, president of FEF Juan Carlos Ureta explained.
It looks like we have more unemployment than we do, and more fiscal deficit than we do, and this lessens foreign confidence.
Spain’s unemployment rate, which hovers just below 30%, is an eyesore, no doubt. And the country’s inability to forecast and control its deficits has forced it to create an independent fiscal authority to monitor the government’s finances. But the upside is the country can improve its economic outlook by merely coercing some of its illicit economy back into the public sphere.
Among the report’s many suggestions for chipping away at the country’s informal economy is lowering Spain’s high personal and company tax rates, which discourage official activity. It also advocates the creation of “mini-jobs,” which employ workers for up to 40 hours a week for up to $520 a month and are meant to incentivize those working in Spain’s underground economy to gradually shift into its official one.
While neither of the measures will fix Spain’s wounded economy entirely, one thing is certain: an illicit economy worth 20% of the country’s GDP isn’t just unhealthy—it’s unsustainable.