It has been estimated that annual shadow economy tax losses in Europe amount to €454bn or 8.6% of tax revenues — ranging from 31% in Bulgaria to 4.4% in Austria.


Earlier this month Pierre Moscovici, European commissioner for Economic and Financial Affairs, Taxation and Customs, urged EU member states to tighten up VAT collection after new figures in a study showed €168bn was lost in 2013.

The study, which is published yearly by the European Commission showed that Finland was the EU member state with the lowest level of VAT leakage at 4% while Romania, despite improvements, has remained the worst, with a 'VAT gap’ 10 times higher than that of Finland.

"This important study highlights once again the need for further reform in VAT collection systems across the EU," said Moscovici.

The 'VAT gap’ is the difference between the amount of VAT collected and the VAT total tax liability (VTTL) — the estimated amount of VAT collectible in a jurisdiction, taking into account national rates and legislation.

The VAT gap figure for the EU has increased year-on-year since the EC started conducting analysis and publishing a survey of the findings in 2013.

"I urge member states to take the steps needed to fight tax evasion and tax fraud at all levels," said Moscovici. "This remains a burning issue and is at the top of this Commission's agenda."

The VAT Gap in Ireland stayed virtually constant at 11% in 2013 compared to 2012 and down from 14% in 2009.

Prof Friedrich Schneider of the Johannes Kepler University of Linz in Austria, Europe's leading authority on the shadow/ black economy, last January in a paper he co-authored cited overall tax losses of €864bn in 2009. The current estimate of €454bn was provided to the Financial Times.

About roughly a third of the losses are from under-reporting by businesses that handle a large proportion of cash. Undeclared work — from cleaning to construction — accounts for the rest.

The European Central Bank says that out of the seven euro banknote denominations, low and medium-value notes are mostly used for day-to-day payments. They are usually issued via cash dispensers. Using the high denominations (€200, €500), people can hold large sums in cash. They serve mainly as a store of value, but are also used to purchase expensive items.

By end-2013, some 7bn €50 banknotes were in circulation. The €50 accounted for almost 42% of all banknotes in circulation and for more than one-third of the total value of banknotes in circulation. The €500 notes, with an overall circulation value of €290bn, accounted for 30% of the total banknote circulation value.

Information on the circulation figures of the seven banknote denominations is available in the statistics section.

In Spain there are banknotes circulating which are worth a total of €43.75bn, which means that the €500 banknotes represent 80% of the total — Spain accounted for 10.4% of Euro Area GDP in 2014 and 12.7% of €500 notes in circulation in the single currency area.

Dr Willem Buiter, chief economist of Citigroup wrote in a note last April:

"The well-known monetary economist Charles Goodhart indeed refers to the proposal to abolish currency as 'shockingly illiberal.' But this cost has to be seen against the cost that the anonymity of currency presents to society. Even though hard evidence is hard to come by, it is very likely that the underground economy and the criminal community are among the heaviest users of currency (where the value of anonymity that currency provides is likely to be the highest). Evidence consistent with this hypothesis includes the fact that high-denomination notes account for a rather large share of total currency outstanding (e.g. €500 notes account for almost 30% of total currency outstanding in the Eurozone by value). In our view, the net benefit to society from giving up the anonymity of currency holdings is likely to be positive (including for tax compliance)."

Europe tax shadow economies 2014The FT writes that experts say governments can reap big rewards from luring workers and businesses out of the shadows but they have no prospect of stamping out evasion altogether.

Said Prof Schneider: “One could crack down 20 to 30% on shadow economy with clever policies but not more.

Last week an article in the Bank of England quarterly bulletin noted that cash continues to be important in the United Kingdom, with demand for Bank of England notes growing faster than nominal GDP. There is now the equivalent of around £1,000 in banknotes in circulation for each person in the United Kingdom.

The chart here shows Prof Schneider's estimates of the size of 31 shadow / black economies in Europe, sourced from this paper.