The shadow economy's share of the total in Romania is the second highest in the EU, according to latest estimates. The figures, released by the EU, suggest that 29.6 percent of Romania's economy is 'shadow' – undeclared, untaxed. The majority (around two thirds) of a shadow economy is made up of undeclared, or cash in hand work, but companies fiddling figures to avoid tax also accounts for a large slice, around a third. Bulgaria topped the EU shadow economy charts, with 32.3 percent accounted for by the underground economy. The EU average for 2011 was 18.4 percent.

Some caution is necessary when interpreting the results.  The illicit nature of shadow economies means there are no real figures, estimates have to be made and thus the results are a best guess. The report carried out by Professor Friedrich Schneider, recognized as an expert on shadow economies, uses indirect methods, which are “based on the comparison of macroeconomic aggregates (such as national accounts, electricity consumption, cash transactions).”

The problem with indirect methods, according to the report, is they tend to over-estimate undeclared work. It's also important to remember that the figures are percentages of the each country's total economy. This means that Romania and Bulgaria do not necessarily have the biggest shadow economies. Germany's economy is many times bigger than Romania's, so with its shadow economy estimated to represent 13.5 percent of the total, it probably values around twice as much as Romania's entire economy. The figures, however, are useful for international comparisons and year on year developments.

Romania's shadow economy has shrunk since 2003, when the percentage was estimated at 33.6 percent. The reduction has been gradual and consistent, with a fall recorded every year, except between 2008 and 2009, when the figure stayed at 29.4 percent for the two consecutive years. Despite the reductions, Romania's position in Europe has remained constant, as there have been similar falls across the continent.

Looking at the regional picture, there is not a simple East/West split: The Czech Republic, Slovenia and Slovakia all better the EU average with 16.4, 16 and 16 percent respectively. These figures suggest that their shadow economies are smaller than Belgium's (17.1 percent), Spain's (19.2 percent) and Italy's (21.6 percent). Austria has the EU's smallest percentage of shadow economy, with 7.9 percent, just behind its non-EU Alpine neighbor, Switzerland, where the shadow economy is estimated to account for 7.8 percent of the total.

Liam Lever, liam@romania-insider.com