European Economies and Economics

(cutting to the chase:) apparently it DOES take an Advanced Degree (tm).

Stardate: May 2018

A few years back Greece was having a real serious economic problem. Spending was out of control, government revenues were inadequate for debt service, yadda yadda. Heard it before.

All true, but not new. And still there.

The real issue was NOT that spending was out of control, but rather than federal tax revenues were inadequate to pay for services spending and debt was increasing to cover the gap.

Why were tax revenues inadequate? Why was spending so high?

Well, the spending was NOT so high. The revenues were short, for sure.

Why inadequate tax revenues? That is the real problem and question.

Citizens weren't lazy bums (altho others elsewhere certainly said so).

The problem is this: the gray-market economy is as large as the "real economy" (the reported economy). They don't trust the national government to be/do the right thing, to be honest and not corrupt, so the Greeks treat tax-evasion as a national pastime.

First off, what's gray market economy? ("black market" is illegal/stolen goods sold; white market is the regular market we participate openly, and is reported openly.)

Gray market economy is unreported financial transactions. Transactions that are handled as swaps, or all cash, un-reported as taxable income. You hire someone to cut your lawn, pay them in cash, they don't list that as taxable income anywhere, no one knows about it.

There is gray-market activity like this everywhere. You, as person hiring a lawn-cutter, do not know that the employee here is not going to report the income. You pay in cash, it's untraceable.

So of course no one knows the size of the gray market--it's not reported so it can't be measured. The *estimate* I've seen is that Greece's gray market is the same size as its white market. So if the gray market all moved to white, the tax revenues would be sufficient to meet national spending needs.

Everyone was worried about Greece at the time, but Greece is tiny. Problem not solved, apparently, but not in the news. GDP/debt ratio is bad.

-----

So that same problem exists in Italy now. Same origin, same reasons, same issues. You read about the problems here and there, will Italy remain in the EU? Can it? No one talks about the source issue. They talk about the Euro, as though unified currency is the problem, versus being able to devalue their own currency in the market. (Well, that might help, for a little while, but it's a terrible idea.)

The fundamental problem goes unspoken. Basically: the citizens are crooks. Well, that sounds harsh: they are tax cheats; they all know it. If you confronted one of them, you'd get an earful. Is/was the same in Greece.

The pure-cash/barter economy allows a lot of tax cheating.

I can't do it in my business, I need the proper openness of white market. But I see plenty of gray market around me. Participants drive around with snakes on their plates.

Italy's economy is 10X bigger than Greece. Had Greece folded, there'd have been much hand-wringing and teeth-gnashing, but the fallout would have been pretty small. Italy has a problem? That's going to be a bigger splash.

-----

This is a flaw in the economic models you hear about: why Alan Greenspan's view of economics was inadequate: the black and gray markets are things they can't think about, and are bigger than they imagine. When half the annual economic activity is unreported gray market, well, the white market has problems. The government cannot pay its bills.

And it's not like gov officials there don't know about it. The problem is that EVERYONE participates.

No, I don't know how to fix this. Well, get rid of cash. All transactions are electronic/online, therefore traceable. Otoh, that pushes people towards crypto-currency, which I'm not convinced is safe/secure.

-----

Later: this gray-market activity is also knows as "underground economy". All off-books, no-taxes-paid.