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Spain's unemployment rate could climb to 30 per cent by 2015, up from a record 27 per cent now, according to Société Générale. Such staggering levels of joblessness would signal economic devastation just about anywhere – except in Spain, where the average Spaniard would roll his eyes and tell you not to worry, everyone knows the numbers are an illusion because so many people are employed in the country's robust underground economy.
Spain's real problem is that while its jobless situation may not be as bad as the official numbers suggest, its fiscal situation may be even worse, thanks to the large number of workers now operating in the untaxed shadow economy. Every worker who evades paying his or her taxes puts another hole in the country's already leaky fiscal boat and makes recovery that much more difficult.
Spain's underground economy, estimated to be equal to one-fifth of its official gross domestic product in 2012, has been large for years. Consider that in 2006-07, when the economy was charging ahead prior to the crash, the country's unemployment bottomed out at 8.5 per cent – a level that would be considered recessionary in most developed nations. But despite the official figures, employers complained they couldn't find workers. "It's an open secret that the Spanish jobless rate – double the European average – is a fiction," the Financial Times said two years ago.
To be fair, Spain isn't the only European country to suffer from a large under-the-table sector. A recent study for Visa Europe estimated Europe's shadow economy in 2012 was worth €2.2-trillion, representing 18.9 per cent of official GDP in the 27-member euro zone. If the continent's underground economy were an actual economy, it would be Europe's second largest.
But that doesn't let Spain off the hook. It is one of only four euro zone countries where the shadow economy has grown since 2008 in comparison to the official economy. (The others are troubled Italy, Ireland and Portugal.) The Spanish government of Mariano Rajoy has been trying to fix the problem by cracking down on tax fraud and strengthening the hand of employers in setting wages. It has also offered partial amnesty for Spaniards who come clean about undeclared earnings – although few have taken up the government's offer.
Spain remains hobbled by structural issues, including a bifurcated job market that favours elite insiders. Too many workers, particularly those in the public sector, have secure long-term contracts, while a disproportionately large portion of the rest are employed under temporary contracts that offer fewer protections. Many Spaniards, accustomed to tales of official corruption at all levels, have chosen to pursue under-the-table employment options and thumb their noses at the taxman.
Like other troubled European economies, there are no easy fixes for Spain. But the government mustn't give up: A stunted tax base robs the treasury of much needed revenues to pay for services and meet the country's debt obligations. The under-the-table workforce also applies deflationary pressure by keeping wages low and undercutting the prices offered by legitimate businesses.
It's bad enough when that happens in more marginal nations like Greece. But Spain, with its trillion-dollar economy, is too big to operate this way. If it can't find a way to bring its shadow economy back into the light, it will provide another rationale for northern Europeans to avoid helping their southern neighbours. That is the last thing the euro zone needs right now.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.
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