Shadow Economy: Are the Stop Signs In Place? 

 

Even in times of rapid economic growth many EU states struggle in their fight with illicit trade and undeclared labour. The risk of growth of the shadow economy may begin to rise as economic forecasts worsen.

What drives illicit trade and the undeclared labour market? What causes come to play the most in the illegal excise goods market: is it taxes and regulation, public justification of the shadow economy, or flawed detection and penalties? Finally, are governments using the right strategies to counteract illicit economic activity?

New empirical research from the Lithuanian Free Market Institute provides unique evidence of the actual drivers of the shadow economy from a comprehensive cross-country perspective.

The event will discuss key arguments that should underlie EU decision making if we are to see any breakthrough in minimizing the staggering and disturbing differences in levels of illicit trade and labour among member states. Continue reading

Is the future cashless?

IMG_8631When travelling in Scandinavia most items from subway tickets to your coffee shop latté can be purchased using your credit or debit card of choice. The convenience and efficiency of this system has led other European countries to pursue this same track towards a virtually cashless economy. As cash is removed from the picture, the confound of the shadow economy are simultaneously reduced. However, experts warn stripping the economy of cash would mean less privacy at the cost of consumers. We gathered experts from business and academia to discuss the future of a cashless economy, as we have seen it develop in Scandinavia.

Cash is not for free

The expression “there is no such thing as a free lunch”, immortalized by Nobel laureate Milton Friedman can also be used in the case of cash, as there is no such thing as free cash. There are costs related to printing, transport, destruction of old bills and so on. As an example, according to IMG_8886MasterCard Vice President Katarina Kakalikova as much as 1, 5% of GDP is spent in Germany every year on the use of money. Even though far from the consciousness of the average citizen, the costs are real and are being carried by the consumer and the tax payer. Especially when we consider the loss from cash involved in the shadow economy, does it not make sense to follow the Scandinavian example and move towards a cashless economy?

Removing cash will not eliminate crime

Shadow economy expert Professor Friedrich Schneider was quick to make the point that removing cash from the transaction equation will not eliminate shadow transactions. As long as there is profit motif for crime, criminals will find ways to operate, with or without cash. However, removing cash from the equation would make some shadow transactions more difficult. According to research IMG_8867presented by Professor Schneider this might reduce the overall size of the shadow economy by 15 to 25 percent. This would mostly be the case for low-threshold shadow economy cases however, and not in more organized criminal transactions. Nor should the goal be to legislate a cashless economy in Europe, as Mastercard’s Katarina Kakalikova argued, there is a business case for more cashless solutions, but there is no need to force it through via legislation. Mastercard and others are instead tasked to convince the consumer that cashless is the best solution for them. Vytautas Žukauskas from the Lithuanian Free Market Institute argued in the same vein, pointing out that if left to the market, cashless solutions would spread according to consumer demand.

Is it a matter of privacy?

On the surface of it, a cashless economy seems more efficient and less prone to shadow economic activity. Why should we then want to keep cash in the loop? As Professor Schneider pointed out, cash has an anonymity about it which allows people to unguardedly go about their transactions. Just as you would not want everyone knowing where you like to get your hair cut, you might also not want companies to know when and where you got yourself a coffee during your lunch break. A cashless economy has the potential to track every financial movement you make, and it is a trade-off IMG_8876consumers should be aware of when they chose to use their credit card over paying in cash. Žukauskas points out that the free market could offer a solution if consumers value privacy in their transactions. Providers would offer more extensive privacy solutions, so as not to lose customers. He does however stress that freedom exists on both sides of the counter, and that just as a customer, a provider should also be free to choose which payment methods he or she uses. Kakalikova agrees, pointing out that MasterCard is constantly working to improve the privacy of clients.

It’s all in the Internal Market   

Our experts principally relied on market mechanisms to explain how challenges to cashless payments can be met. In doing so they relied on competition as the core tool, and as the saying goes competition is the whetstone of talent. There is a definite business case for making cashless payments more widespread in Europe; it limits the realm of the shadow economy and it cuts costs associated with cash. However, there are some payments where individuals might still prefer the privacy offered by cash. For this reason our panelists did not expect to see an entirely cashless future anytime soon.

 

Håvard Sandvik, European Affairs Manager FNF

Håvard Sandvik
European Affairs Manager

 

Upcoming Event: “Can we have an economy without cash?”

IMG_8631Thursday, 26 November 2015
12.00-14.00h

Venue: Friedrich-Naumann-Stiftung for Freedom
Avenue de Cortenbergh 71, 1000 Brussels

 About the event
In the future Europeans could live in a cashless society, where actual coins and bills never change hands. Some EU member states, notably in Scandinavia, have facilitated a largely cashless economy, although cash still forms the basis of the economy. Continue reading