10 Years Later, Tax Evasion Threatens to Undermine the Euro

flickr / Davide "Dodo" Oliva

Today is the 10th anniversary of Euro as the zone’s single currency. On February 28th, 2002, all of the various currencies from Eurozone countries, which had been linked with fixed exchange rates to each other and the Euro for a trial period, ceased to be legal tender between member states. A decade later, the survival of the single currency seems to be in question thanks to the events inside Greece, Italy, and elsewhere.

There are many reasons why the Eurozone is facing crisis. Here at the Task Force, we find it important to focus on one major component: tax evasion. Sovereign debt is far from the only factor in the crisis, but it is a major one. The Task Force’s Richard Murphy made this point back in November. Murphy wrote,

We wouldn’t have a world economic crisis now if we hadn’t had tax evasion. The current crisis focuses on the Euro. Italy is at its epicentre. It has external debt of €1.9 trillion. If only it had suffered the UK’s rate of evasion in the last decade then its deficit would be less than half that sum now. The same would also be true for Greece, and only slight less so for Spain. In other words, if tax evasion in these countries had been taken seriously and been tackled in these countries we would not have a Euro crisis today. That’s how important tax evasion is.

The UK does not have some kind of magically low rate of tax evasion. Murphy puts the UK’s shadow economy at 12.5% of GDP, much higher than the US rate of 8.6%. Greece and Italy both sit at 27%.

Austerity bites much harder when you have a smaller tax base. Greece’s economic growth, and therefore its future tax revenue, are already suffering from deep austerity. With so much of the economy hiding from tax collectors, taxes must be raised even further to cover the budget gap, or spending must be cut even deeper than before. With less burden-sharing, you’ll see more social unrest and harsher economic contraction. To make matters worse, tax evasion and illicit financial flows have been shown to enter into a nasty feedback loop with the size of the shadow economy, which can spiral out of control without government action.

Greece and Italy have their own cultural problems with tax evasion. There won’t be any quick fixes on their part to correct that kind of deep-seeded social problem, and especially not by actors in the Troika and international community writ-large. But that doesn’t mean that the rest of the world can’t act to help Greece and Italy clamp down on tax evasion. Large-scale tax evasion is an international problem. Here are three things that we could do right now to help Greece and Italy out:

Continue to strengthen the EU Savings Tax Directive (EUSTD), making it more difficult for tax evaders to move their money around European Union member states. Showing horrible timing, Germany is actually getting in the way of the law’s progress right now, as the Task Force’s Nick Shaxson wrote this week.
Stop allowing for the creation of anonymous shell corporations, a favorite tool of tax evaders for laundering money. Very wealthy Greek and Italian individuals who seek to evade taxes can easily hide behind them in tax havens.
Set up automatic tax information exchange relationships throughout the world. The EU has this in the form of the EUSTD and the U.S. and Canada also have one, but all of major world actors need to be linked together. AETI would be a game-changer for the Greek and Italian tax services, and they would very quickly be able to shrink the size of tax evasion in their countries. Chris Lawton made this argument about the U.S. and Mexico this month, and it applies just as well to Greece and Italy.

These three items alone will not solve the Greek and Italian tax evasion problem, but they will go a long way toward making the problem more bearable. Greece needs to break that illicit activity-shadow economy feedback loop, and quickly. The international community only makes its problems worse by not contributing to that process.