A review of the driving forces of the informal economy and policy measures for mitigation: an analysis of six EU countries

Abstract

This study presents detailed estimates of the shadow economy's size and development in all European Union (EU) countries with particular emphasis on six specific countries (Germany, Austria, Denmark, Greece, Italy, and Romania) from 2003 to 2022. It focuses on understanding the key factors that motivate economic agents to engage in shadow economy activities within EU and particularly these countries. The estimates presented show a significant reduction in the shadow economy's size from 22.6% of GDP in 2003 to 17.3% in 2022, highlighting the effectiveness of various policy measures implemented in most EU countries with particular focus on these six countries. Despite a slight increase in the shadow economy across most EU nations due to the Coronavirus pandemic after 2020, our research identifies the main determinants of economic informality in most EU countries. Our analysis expose that weak institutional quality, ineffective government institutions, complex and burdensome tax and regulatory systems, the lack of strong legal systems, and pervasive corruption are the main determinants of economic informality in most countries of the EU. The study thoroughly reviews the driving forces behind the shadow economy and discusses the specific policy measures these six countries part of this policy analysis paper have adopted to mitigate and reduce its presence.