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The Gray Economy: Europe’s 1.5 Trillion/Year Black Hole

from Zero Hedge

With Greek tax-collectors under increasing pressure to squeeze their quote out of an increasingly bombastic population, 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.

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