Ralph Atkins at the Financial Times Frankfurt bureau reports on a new Deutsche Bank study into how much black market transactions support European economies. The bank finds that at the extremes, populations who are scrupulous about complying with government regulations and those that ignore them benefit, while those in the middle like Germany suffer.
Countries with a high prevalence of moonlighting builders, unrecorded cash transactions, missing invoices, tax evasion or illegal activities such as drug dealing, have seen smaller contractions during Europe’s worst downturn since the 1930s than more honest neighbours, researchers at the Frankfurt-based bank have concluded.
The relationship works, however, only if the “shadow economy” is large – such as in Greece, where George Papandreou, prime minister, acknowledged this month that the public services are riddled with corruption.
At the other extreme, Deutsche Bank found that countries with a “particularly honest” population – such as Austria, France or the Netherlands had also fared relatively well during the crisis.
It's an interesting economic question to explore and Atkins does a good job of laying out the issue in a short article. What the DB economists seem to have uncovered is that shadow economy workers don't tend to be big savers because it creates a paper trail to their illegal activity, so their activity boosts consumption. On the other hand, the honest are big savers, which benefits society long term.
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