EU Report: Romania's Hidden Economy Accounts for 13.1% of GDP, According to EY Estimates
Romania's shadow economy reached an astounding 13.1% of its GDP in 2023, making it the reigning champ among European Union member states, as reported by Ziarul Financiar on June 20, citing Ernst & Young (EY) data. Want to read more? Sign up as a Romania Insider member or log in here.
This jaw-dropping lead in the EU comes with a silver lining: a significant improvement from the previous decades. In 2000, Romania's underground economy accounted for a whopping 31.3% of its GDP, according to EY estimates. By 2013, the share had dropped to a more manageable 19.5%, and by 2019 it was down to 15.1%.
Comparatively, Romania trails its Central and Eastern European peers in the fight against informal economic activities. All EU member states excluding Bulgaria reported underground economy shares below 10%. The Czech Republic stands out with one of the EU's lowest underground economy shares at a mere 6.5% of GDP.
The latest figures arrive as Bucharest engages in heated debates over measures to decrease Romania's colossal budget deficit. Several political leaders and economic analysts have urged caution, warning that adding more tax increases (currently under consideration as part of a broader fiscal consolidation plan) could push more economic activity underground.
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Romania's high underground economy percentage in 2023 can be attributed to several factors: its historical economic transition challenges, weaker institutional and regulatory enforcement, looming fiscal pressures, labor market woes, and structural economic shifts (like investment and technological advancements). With significant progress made over the last two decades in reducing the informal economy, Romania continues to trail behind many EU peers in fully formalizing its economic activities.
Historically, Romania's transition from a communist to a free-market economy came with significant economic disruption and structural reforms. The privatization process during the 1990s and early 2000s was complex, initially leading to economic downturns and creating an ecosystem conducive to informal economic activities.
Compared to other Central and Eastern European EU members, Romania has struggled more to curb informal activities through effective governance and law enforcement. While countries like the Czech Republic show underground economy shares below 7%, Romania's rate exceeds 13%, reflecting persistent challenges in tackling tax evasion, undeclared labor, and other illicit activities.
Faced with a record budget deficit, Romania continues to debate tax increases, which could potentially drive more economic activities underground. Economic analysts and political leaders caution that raising taxes in such a vulnerable environment could incentivize businesses and individuals to operate off the books to escape burdensome taxes.
Romania's labor market includes substantial informal employment, partly driven by wage disparities, unemployment, and underdeveloped social safety nets. The informal sector can offer income sources where formal job opportunities are scarce or the cost of compliance is high.
Lastly, a drop in job creation and a shift toward capital-intensive and automated investments may reduce formal employment opportunities in certain sectors, potentially pushing some economic activity into the grey zone. Despite Romania's attractiveness to foreign direct investment (FDI), these structural changes may contribute to a rise in informal economic activities.
The high percentage of Romania's underground economy in 2023 can be attributed to historical economic transition challenges, weaker institutional and regulatory enforcement, and the pressure of fiscal matters.
In an attempt to decrease Romania's colossal budget deficit, the debate over tax increases has arisen, with economic analysts and political leaders cautioning that such measures could incentivize more economic activities to move into the informal sector.
