Black economy could rescue project

Date: 05/09/1996

THE mounting pressure to cut public spending ahead of the start-up date for monetary union, combined with the European economy's apparent failure to deliver the hoped-for upturn, is increasingly leading government and other experts to seek support from unexpected quarters.

The black economy, long the bugbear of government planners who regard it as a sign of their failure to enforce the rule of law, is increasingly perceived as a potential ally in the battle to make the EMU dream come true.

With estimates of its size varying from as much as the equivalent of 50&percent; of GDP in Greece to 5&percent; in Germany, some experts have started to argue that fulfilment of the Maastricht convergence criteria should be measured against 'real' GDPs, including the hidden part of the economy.

Up until now, the official reading of the Maastricht Treaty's two fiscal criteria (namely, that a country should bring its public deficit down to or close to 3&percent; of GDP and move its public debt, should it exceed 60&percent; of GDP, towards that target) was that yearly and gobal debt should be measured against that part of the economy which shows up in official records.

But as leading participants in the economic debate have begun to point out, the inclusion of official estimates of the black economy, based on factors such as the evolution of disposable income and the liquidity in the economy, would dramatically ease the task of reaching the Maastricht figures.

The European Office for Social Research (ORSEU) puts the hidden economy's share of total GDP at about 23&percent; in Italy, 15&percent; in Belgium and 10&percent; in the UK.

Including this in the convergence calculation would substantially alter the whole foundation of the EMU debate.

Yet advocates of such a move would have to answer the argument that since the determinant characteristic of the black economy is that it is hidden from official scrutiny, estimates of its size could vary so much that their inclusion in the Maastricht equation would lay the convergence test open to the charge of political manipulation.

This, say critics, might crucially deprive the EMU project of the credibility so vital for its success with financial markets and the public.