Shrinking the underground economy

The Greek economy would have achieved convergence with the rest of the European Union long ago, had it not been for decades-old dysfunctions that have evolved into a curse for working people and law-abiding taxpayers. The main dysfunction is the country’s extensive underground economy. Data published by the government last week shows that tax evasion is almost three times that of the European Union average of 15 percent. Had Greece achieved convergence in this field, its per capita gross domestic product (GDP) would have surpassed the EU average, whereas today, in terms of purchasing parity, it is around 80 percent. Moreover, public revenues would have been about 50 percent higher and the public debt would have shrunk to around the Maastricht criterion level – 60 percent of GDP, compared to the 110 percent where it stands today. By the same token, debt and interest payments would have been around zero levels. In other words, the fiscal result of shrinking the underground economy would have been spectacularly positive and the budget would have a large surplus. Development Minister Dimitris Sioufas’s recent remark that «Greece has the cheapest gasoline in the EU» has to be accompanied by a comment that wages, too, are much lower. According to data by Eurostat and other international organizations, Greek average gross pay (net salaries plus employees’ social insurance contributions) in 2003 was 12,890 euros, against an average of 19,470 euros in the EU (about 67 percent). With gasoline prices at about 80 percent of the EU average, Greeks’ purchasing power for gasoline is 83 percent of its EU peers. Such comparisons mean that in order for Greece to achieve real convergence with the rest of the EU in 10 years (rather than 20, as the Bank of Greece estimates) and parallel with steady raises in Greeks’ real income, prices rises must be on a par, or many products and services must priced under the eurozone level. But a basic prerequisite for price stability is fiscal rehabilitation, which is achieved by limiting waste and, particularly, by shrinking the underground economy. Without this, taming public debt and deficit and achieving convergence of incomes is impossible.

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