The public debt in excess as a threat to the National security
The continuous growth of the public debt, inducing an ever diminishing solvency of the debtor Country, puts the protection of the national economic security of the same debtor at risk. The dependence of a debtor Country towards the pressures of foreign protagonists (public and private) grows with the increase of the Government securities issued by the debtor Country and undersigned by the foreign entities. Furthermore, the growth of the debt stock of a Country puts the sustainability at risk, in the medium-long term, of adequate funding for its internal and international security. The recent default risk run by Greece has demonstrated the possibility of the verification of these consequences. The economic-financial Intelligence of the Information Services for Security can contribute a real cognitive support in the difficult dynamics of the debt return, given the constraints of economic policy. In this regard, the checking for ‘hidden’ conduct of productive systems/persons having mostly territorial characteristics could be important.
One of the activities entrusted to the Economic-Financial Intelligence of the Government Intelligence Services, in the pursuit of submerged amounts of “added value produced” (parts of economic activity which are not declared and, therefore, are not available for the imposition of income tax) concerns the search for irregular behaviour which, throwing the most respected operators out of the market, creates dangers for the economic security of the State.
““It is always more frequent, in these times of financial and economic crisis, to read of fears relative to the risks of failure of a State. The concern is strong also in Europe, where sixteen Countries have tied their fortunes through the adhesion to the Euro, which on the one side represents a strong shield of credibility for each Member, on the other, a reason of anxiety for the Governments of the Eurozone and for the Central European Bank, for the costs of the speculative attacks that try to draw benefits from the contingent difficulties”.
Thus, it was expressed, in October, 2008, in the editorial article of this Review (1)
It was in the immediate post-Lehman period and in the antechamber of events which, at a distance of 20 months, materialized in the default of Greece.
As we can see, it was a two-way game with four players: a Country (Greece) and the Eurozone on the one side, and the markets and the Greek community on the other. In this interactive scheme, the second side has responded to the inefficiency of the first side causing spirals of instability. The demonstration shows in the elevated volatility of the premiums for the credit risk on Government securities due to the progressive deteriorating of the debit positions of all the Countries of the Euro area (2)
(and not only of Greece).
In Italy, the last Economic Bulletin of the Bank of Italy (April 2010), confirmed the deterioration in 2009 of the state of the internal public finance, although to a lesser extent compared to the other principal advanced economies, all involved in the financial crisis and the real sequel to the defaults of the derivatives, stemming from American subprime credits.
The net debt of the State Administrations (3)
has risen to 5.3% of the GDP (+2.6 percentage points compared to 2008), while the primary deficit (4)
stood at 0.6% of the GDP (compared to a primary surplus equal to 2.5% of the GDP in 2008).
The debt of the public Administrations (5)
has resulted equal to 115.8% of the GDP (+9.7 percentage points compared to 2008). The situation in 2009 reflected the marked growth of the primary expenditure and the downturn of the revenues, both almost entirely ascribable to the international crisis.
In 2009, 50.65% of the securities of the public debt were held by non-resident investors (+1.31 percentage points compared to 2008).
From the data of the Bank of International Regulations (BIR) of Basil, at the 31st December, 2009, the three principal creditors of Italy were:
- France (holder of credits to Italy to the value of 393.1 billion Euros, equal to 36.5% of the total);
- Germany (holder of credits to Italy to the value of 146.2 billion Euros, equal to 13.5% of the total);
- The United Kingdom (holder of credits to Italy to the value of 59.2 billion Euros, equal to 5.5% of the total).
Therefore, of the 50.65% shown by the Bank of Italy, more than half (6)
is in the hands of only three Countries.
If interpreted generally, the preference towards the acquisition of Government Securities by foreign Countries could correspond to:
- a strong credibility of the issuer. This interpretation fits more in the case of a subscription of private debt, where the subscriber takes on the risk of the bankruptcy of the issuer and, therefore, of loss of investment. Instead, in the case of public debt, there is a major protection of investment in Government Securities, insofar as, the sovereign issuer cannot fail and there is always a “lender of last resort” (LLR), as demonstrated in the case of Greece – although not before much hesitation);
- an investment of geopolitical matrix by the subscriber. This explanation concerns the will to “control” an economy through acquisition of debt contracted by the subscriber’s own government and becomes a strategically important aspect, at a global financial level, the moment in which, among the subscribers there are emerging Countries with political regimes which are relatively undemocratic. The second aspect draws strongly on the attention of the public opinion in the United States.
Last February, The Wall Street Journal (WSJ) (6) underlined a connection between public debt and national security. According to this newspaper, the continual increase in the public debt, inducing an ever diminishing solvency of the debtor Country, puts at risk the protection of the national security of the debtor Country itself. Referring to the United States economy, Richard Haas, President of the Council on Foreign Relations, interviewed by the WSJ, expressed his own fears relative to the possibility that from the constantly rising Public Budget deficit (and, consequently, of the debt), vulnerability of the national security of the United States could arise.
In particular, according to Haas:
a) the dependence of a debtor Country towards the pressures of the foreign exponents (public and private) grows with the increase of the Government Securities issued by the former and underwritten by the latter.
The United States has circa 7.5 million billions of dollars in public debt, of which approximately 50% is held by foreign investors (as subscribers of the issued and covered securities). In the interview, Haas states how the situation is susceptible to the generation of a growing dependence of Washington on the Governments of the creditor Countries (in particular, on China, first Country holders of US Treasury bills) (7)
. The creditor Countries (through public declarations of no confidence in government representatives or newspapers - referring to this last, or through operations on the international markets made by their Central Banks) are able, in fact, to create pressure on the economy (and on its currency), which is difficult to anticipate;
b) the growth of debit stock of a Country places at risk the sustainability, in the medium-long term, of adequate appropriations for its national security.
In the United States, the prevision for 2010 of the military expenditure is 688 billion dollars, largely for the financing of the military presence in Iraq and in Afghanistan. According to Haas, unless there are changes in the current dynamics of the US debt, during the same 2010, the need to make reductions in the programming may occur.
The fear is internationally recognized. The Obama Administration has created a bipartisan commission responsible for suggesting solutions (8)
and the Secretary General of NATO, the Danish, Anders Fogh Rasmussen, gave a warning to the Member Countries, on the 17th of last May (9)
not to start any drastic reduction in the appropriations for the national security which would be susceptible to raise the vulnerability level of the Alliance in the long-term. The global insecurity and instability, according to Rasmussen, has a direct influence on the costs for the domestic security of every Country, worsening, moreover, the internal fiscal position caused by negative reverberations on the development and trading.
The recent Greek default has demonstrated the truth of both conditions A and B, described by Haas.
Athens had to “submit” (though in a peaceful and agreed ambit) to the conditions dictated by the creditor Countries, in primis, Germany, which possesses the largest share of Government Securities (circa 75 billion Euros) and by non EU international bodies (like the International Monetary Fund). Furthermore, Athens also had to heavily cut the military appropriations for the year 2010, from 14 billion Euros (5% of the GDP) to 6.7 billion Euros, putting at risk its own policies of regional defence (10)
The situation experienced by Athens is the cause (and was caused) by much bearish pressure on the euro, European exchanges and corporate bonds and was caused by “words” and “facts” widely uncoordinated compared to a Community logic.
Due to fear (particularly German) of the deterioration of the domestic debt position, Italy, for example, is served, periodically, with declarations of no confidence. Last 22nd May, the Frankfurter Allgemeine Zeitung “foresaw” that the Italian debt could become a considerable problem in the medium-long term, posing the question whether Italy could find itself among the Countries forced to ask for help.
Relative to the repeated attacks on the hedge funds, insofar as it is possible that these speculative funds ( like any brief period investor) are focusing on the fall of the European markets, it is difficult to believe that operators who possess barely 3% of the international assets can, by themselves, so heavily condition the markets.
Instead, (continuing with the examples of “words” and “facts” far from the Community spirit), the almost incomprehensible declarations have appeared by the President of the Deutsche Bank, the Swiss Josef Ackermann, relative to the doubts on the possibilities of Greece to reimburse the debt contracted in recent days. Statements to the detriment of the credibility of a Country which represents the largest debtor of Berlin, can undermine the capacity of reimbursement of Athens with reverberations on Berlin itself.
Furthermore, of even more difficult appraisal is the decision of last 18th May, by the BAFin (Bundesanstalt fŘr Finanzdienstleistungsaufsicht), the German CONSOB, to forbid the so-called ‘naked’ sales on the ten principal German financial Securities quoted on the Frankfurt Exchange, on the bonds issued by the Eurozone Countries, and the Credit Default Swap relative to such securities. A decision which, had it been taken by the entire Euro area, would have been important (given the amount of instances of international financial lobbying it would have overcome). In this way, instead, Berlin has simple transformed the Government Securities of the Euro Countries into a new category of toxic assets, triggering off speculation on the Euro and making the Euro exchange fall: Dollar from 1.24 (level reached thanks to the stabilization plan for Greece) to 1.21 (value registered the last time in April 2006).
Furthermore, in the auction of last May 26th, relative to the Bund at 5 years, Germany received lower offers than those programmed, confirming the reduction of its appeal as a ‘shelter Country’.
Given the worrying trend of worsening of the public debt position, the (BIR) (11)
has made a projection of the dynamic ratio [Debt/GDP] conceivable in the next 30 years (12)
for 122 principal
Industrialized economies (13)
. The conclusions of this econometric exercise are extremely disquieting (14)
1) unless there are changes in the positions of fiscal policy, or drastic reductions in the social security expenditure, within 2020, the ratio [Primary deficit/GDP] will grow everywhere at disastrous rates: 13% in Ireland; 8-10% in Japan, Spain, United Kingdom and in the United States; 3-7% in Austria, Germany, Greece, Holland and Portugal. According to the study, only in Italy, the primary deficits should remain contained, thanks to the presence of relatively more stable fiscal dynamics;
2) given the projections on the primary deficit (as in point 1), in the next decade, the ratio [Debt/GDP] could explode, exceeding 300% of the GDP in Japan, 200% in the United Kingdom, and 150% in Belgium, France, Ireland, Greece, the United States and Italy.
In furnishing its suggestions of economic policy, the BIR has calculated what dynamics of primary surplus (that is, of budget surplus after the deduction for interest payments) would be necessary to restore the ratio [Debt/GDP], at least to the pre-crisis level of 2007. For Italy, the primary surplus necessary has been calculated in:
a) 5.1% of the GDP (if one wishes to reach the objective in the next 5 years);
b) 3.4% of the GDP (with an objective of 10 years);
c) 2.5% of the GDP (with an objective of 20 years).
Therefore, in a context already bound by the criteria of fiscal stability provided for by the Maastricht Treaty (15)
and by the criteria of coordination of economic policies called for by the Pact of Stability and Growth (16)
, Italy, with a negative primary surplus in 2009 (-0.6% of the GDP), will be forced to resort to restrictive fiscal policies which are, however, different from the increase of taxation, in order not to be indifferent to the social and employment stresses generated by the international crisis.
Excluding the issue of currency (capacity lost with the adhesion to the single monetary system) and the increase of the public spending (made not easily acceptable by the presence of a primary Deficit and a ratio Debt/GDP above the thresholds indicated by the European Commission), what remains to help to return from the current debt position is the issue of Government Securities and the taxation of taxable items not previously assessed, that is, produce in the area of the submerged economy.
Speaking of Government Securities, the market of the Public Debt of the Eurozone is, in this phase, fragile and volatile, despite the support guaranteed by the acquisitions on the part of the European System of the Central Banks. The technical concerns of the markets (the magnitude of the flow of demand for bonds, of State Securities in Euro, to those of the United States; the shortage of substantial subscribers on the secondary markets of bonds of the “peripheral” Countries of the Eurozone; the excess of liquidity at the Central Banks of the euro area) are accentuated by an often inefficient governance of the Euro area.
The same continual increase of the yields of the Government Securities must be held in consideration. The need of the market (expressed, obviously, not only for Italy) of higher risk premiums corresponds to a generalized lack of confidence, which has a future cost. If we take the Italian Treasury Bonds (BOT), the monetary instrument par excellence, in the auction of the last 11th and 12th of May of the BOT at 12 months (17)
, the weighted average Yield which emerged (1.442%) represents the highest value for more than a year in these parts. Analogous reasoning can be proposed for the already cited auction of German Bund at 5 years, where returns offered, very low (average 1.47% compared to the 2.2% of an auction in April of Bund), could have turned investors away. Since the return on the BOT depends on the difference between the nominal price and the price of assignment in the auction, a higher yield indicates a reduced inclination to pay high prices on the part of the buyer. The curve of the risk premiums, therefore, becomes, in this way, a reliability indicator of a Country for the market (18)
The exit strategy option chosen for Greece was particularly large. On the 2nd of May, 2010, the Ministers of the Eurozone, recognizing (jointly with the European Commission and the International Monetary Fund - IMF) the insufficiency of a mere access to the market by Athens to resolve its systemic crisis, reached an agreement (unanimously) for the concession of bilateral loans, centrally coordinated by the European Commission. The agreement between Greece, the European Commission and the IMF makes available to Athens a stand-by loan programme up to a maximum of 110 billion Euros to repay in 3 years, of which:
a) 80 billion allocated by the Countries of the monetary area in bilateral loans subdivided according to the capital contribution of the European Central Bank (in chart on the side, percentages). The Italian share in the package of support (approved by the Council of Ministers of the 7th of May 2010) is up to a maximum total of 14.7 billion Euros;
b) 30 billion Euros allocated by the IMF, assistance equal to 32 times the Greek share in the Fund.
The Council of Economic and Monetary Affairs (ECOFIN) of the European Union has reached a general scheme of action on loans, created to cope with any threats of insolvency by the Member Countries, as well as protection of the Euro. The so-called “Mechanism of European Stabilization” includes:
- a Fund for European stabilization of 60 billion Euros (ex Article 122.2 of the Lisbon Treaty of assistance to the Balance of Payments, guaranteed by the Union’s own resources;
- a Special Investment Vehicle (SIV) with budget equal 440 billion Euros to supply guaranteed debt or bilateral debt to the Countries in difficulty;
- the participation of the IMF with a maximum availability of 250 billion Euros.
The total of aid to the Countries of the Euro area amounts to 860 billion Euros.
The European Central Bank (ECB) participates in the mechanism of stabilization through a direct intervention on the secondary market of the Government Securities of the Euro area (so-called Securities Market Programme) with the scope of lowering the returns and making recourse to credit less burdensome. The “sterilization” of the inflationary effect of the purchases of securities is made through fixed deposit operations. In this way, the ECB does not enter into inflationary policies of quantitative easing, also because it is contrary to the mandate given by the Maastricht Treaty.
The dynamics of fiscal stabilization:
the role of the submerged economy
The second solution available to the Government is the emergence of taxable items not previously assessed. It has been said before that strong motives of public order bind the States of the Eurozone with regard to increases in taxation as a contribution to the rescheduling of the current debt positions.
It could be useful, therefore, to spend a little time on the debate (new for this Review) relative to the connections between tax revenues and tax burden, subject of analysis during the last 30 years, both theoretical and empirical.
The discussions relative to the merit of the tax reduction policies realized in the United States in the first years of the 80’s, focused on the principle (advanced by economists of the so-called ‘supply-side economics’, according to which a reduction of the rate of income tax is able, under certain conditions, to increase the tax revenues. This line of thought, which became famous with the Reagan Administration, based its argument on the incentive-effects produced by the reduction of taxes.
Arthur Laffer, one of the principal exponents of the supply-side economics, drew a curve which related the tax revenues (T, on the vertical axis of the ordinates) to the rate of tax (t, on the horizontal axis of the abscissa) (19)
Analyzing the curve (on the following page), in correspondence with the initial point, both the rate and the tax revenues are void (t=0, T=0). Similarly, when the tax rate is of 100% (t=1), the tax revenues are equal to zero (T=0), because the net income tax is void and there is no motivation to produce or, better, to declare how much produced. Between these two extremes, the financial Administration receives a certain level of revenue derived from the income taxes. Remembering that the tax revenues T are equal, on the average, to a rate t of the income produced, according to the Laffer curve:
- on the left side, with the growth of the rate of tax t, the revenue T grows;
- on the right side of the curve, whatever increase of the tax rate t makes the tax revenues T diminish. Therefore, for analogy, whatever reduction of the tax rate increases the tax revenues
Therefore, according to the mechanism delineated by the Laffer curve, for a given economy, there exists an optimal level t* of taxation on income which maximizes the tax revenues identified on the peak point of the curve. If the rate is fixed below this level (t<t*), an increase of the taxes will boost the tax revenues. If the tax rate is above this level (t>t*) lower taxes will increase the tax revenues (20)
Even if the Laffer curve has not found robust empirical evidence (21)
, the basic mechanism has its undeniable logic. Apart from the formal empirical confirmation of the curve, the plausibility of what has been expressed in the above scheme increases if we introduce into the analysis also the non-assessed production, therefore, the submerged economy and tax evasion.
Busato and Chiarini (22)
have emphasized how, in evaluating the impact of any tax regulations, an analysis is also indispensible of the mechanism of reallocations between the sectors (formal and informal) of the economy and an evaluation of the incentives existing to assume “shadowy” behaviour at the basis of the submerged economy.
In the study of Busato and Chiarini, the loss of tax revenues, in presence of the submerged economy, is considerable. In their “modified” Laffer Curve, for unit levels of the rate (t=1, therefore, against an taxable income collected at 100%, it continues to be production of the submerged economy income, creating in this way, a negative differential between the level of actual revenue and the level of potential revenue.
According to the study, in the presence of submerged economy, the growth of the tax rates penalizes the participation in the regular economy. According to the so-called “compliance effect” (that is, the effect of the regularity in the tax behaviour) to a variation of the tax rate, the tax revenues will undergo further modifications with respect to the traditional effects of” incentive/disincentive”. Said variations will be caused by the characteristics of the informal economy, by the probability of being discovered, by factors tied to the pecuniary and criminal sanctions, and by the facility in the movement from open activities to submerged economy activities.
An increase of the taxation, therefore, which does not adequately consider the presence of the submerged economy:
- will overestimate the result in terms of tax revenues because the taxable income will be overestimated, should the economy be positioned on the part to the left of the curve (inclined upward);
- will push individuals to redistribute as many resources possible (in terms of capital and work) in the sector of the submerged economy, should the economy be positioned on the part to the right of the curve. This last dynamic is susceptible to generate an incentive to reduce both the production and the employment in the official sector of the economy, as well as increasing the evasion. In this last sense, the irregular sector becomes a sort of insurance for periods of crisis.
The submerged economy, representing a universe parallel to the measured economy, involves all of the aspects of an economic system: the behaviour of supply and demand, the fiscal policy, the attitude to risk of the various subjects involved, the productive and dimensional structure, the system of industrial relations and the institutional organization.
The unobserved sector of the economy (and not measured) does not have a commonly accepted definition. A multiplicity of terms is used, often in a random and colourful manner (a submerged, underground, hidden, irregular, shadow, black, grey or informal economy). For the purpose of furnishing an initial limitation to the many definitions, the economic literature suggests assuming as reference, the System of National Accounts (SNA) of the Organization for the Cooperation and Economic Development (OCSE), approved in 1993. According to this System, the term ‘submerged economy’ is given to the entirety of those activities, producers of added value, which the official statistics cannot register.
The perception that the submerged phenomenon has reached significant levels in the Western economies has generated, starting from the 80’s, a vast literature aimed at estimating its dimension. Following the Zizza interpretation (23)
, all of the economic activities for which problems exist in the gathering of statistic data take the name of a ‘not (directly) observed’ economy, and within this concept, it is possible to distinguish the notions of:
submerged economy: regards the legal production which is not known to the Public Administration due to tax and contributory evasion, avoidance of employment legislation and of non-compliance with the administrative regulations;
illegal economy (or criminal): in reference to the activities exercised in violation of the criminals laws, but also to the activities, per se legal, but exercised in a distorted way or without adequate authorization (e.g. smuggling, usury, practice of the medical profession);
informal economy: include the legal activities carried out by productive units with organizational structure (e.g. casual work based on personal or family relations), which makes statistical observation difficult or impossible.
In the specification of a model that estimates the influence of the submerged economy on the product of an economic system, the factors that favour its diffusion are (24)
1) the tax and contributory imposition (the entity of the rates and the complexity of the tax and contributory system represent implicit incentive to evasion);
2) the excess of regulations and bureaucracy (the rigidness and the slowness of the legislation to adapt to the changes; the inefficiency in the activities of control; the discretional power in the application of the regulations);
3) the industrial structure (a productive fabric composed of a myriad small enterprises allows a “camouflage” which makes control by the institutions more difficult);
4) the growing technology present in the economy (the use of computer and communication instruments facilitate the execution of services at a distance, making these activities easier to hide).
A classic taxonomy of the methods for assessing the submerged economy distinguishes between the currency demand approach (which deduces the entity of the submerged economy by the
comparison between macroeconomic indicators (25)
and the model approach (where the submerged is treated as a “latent variable”, which we shall explain further ahead) (26)
. The currency demand approach is based on three principal assumptions (27)
a) the transactions in the submerged economy are made in cash, to guarantee the anonymity and to leave no trace that could be observed by the authorities. According to this assumption, an expansion of the submerged economy should be reflected in an increase in the demand of currency;
b) the principal cause of the submerged economy is the elevated level of taxation and the regulation of the economic activities;
c) the quantitative theory of the money applies fundamental theoretical reference between the different explanations of the variations of the buying power. This theory is valid if; (1) the volume of the production is constant; (2) the money is only an instrument of payment (and not reserve of value). The theory was formulated by the United States economist, Irving Fisher, in 1911, in the following terms: MV=PQ (28)
by which P=MV/Q, that is, each and every increase of the currency supply reverberates directly on the level of the prices.
In the assessment equation of the submerged, used by Tanzi (29)
, the relationship between supply of circulating currency and the supply of non-cash currency (represented by M2 (30)
is function of the taxation, of the relationship between payroll and GDP, of the interest rate, and of the GDP per capita. In general, in the choice of the variables, the following are considered:
1) the rate of tax and contributory imposition (as an approximation of the taxation), held to be directly proportional to the quantity of circulating currency;
2) the interest rate on the bonds, or the yield of the bank deposits, or the interest rate on the ‘overnight’ deposits (31)
, as alternative measures of the cost-opportunity of holding circulating currency instead of the other components of M2. They are held to be inversely proportional to the circulating currency;
3) the criminality, the effect of which is twofold on the circulating currency;
a) from the side of the criminal subject, the rate of criminality is directly proportional to the quantity of circulating currency (crime prefers cash because it is untraceable);
b) from the community side, the rate of criminality is inversely proportional to the quantity of circulating currency (as it increases the probability of theft and, therefore, discourages the holding of same);
4) the complexity of the tax system, the effect of which, on the circulating currency is proportionally inverse to the quantity of circulating currency, since a complicated and incomprehensible system favours the submerged economy;
5) the technology of the payments (32)
the effect of which on the circulating currency is inversely proportional.
The currency demand approach has the advantage of being widely used in literature and, therefore, offers the possibility of making comparisons, also at an international level. These positive aspects do not, however, attenuate the impact of the critics, absolutely well founded, to the approach under examination:
- the transactions in the submerged economy are not made only in cash;
- the use of a model of one equation only, (the so-called ‘univariate’) implicitly equivalent to assuming that the variables that explain the phenomenon (from 1-5) are all exogenous to the system which it is representing and there are no interactions (33)
The second methodology (so-called model approach) considers the submerged economy as latent variable.
In economic and financial science, different variables which are of considerable interest cannot be precisely indicated, since they are not directly observable. The methodology based on the statistics theory of the latent variables refers to approximate hypothetical expressions of observable (or latent) variables.
For example, in the portfolio theory of Markowitz, the analyses are based on two variables which cannot be directly pointed out: the risk and the expected yield of a financial activity.
There does not exist, either for one or the other, a univocal empirical correspondence. Consequently, a group of observable indicators are used, e.g. the average of past yields and certain measures of variability. In other words, the expected return and the risk become two latent variables characterizing the financial phenomenon, the object of investigation. Both these entities correspond to an expectation (future and as such, unknown), which the investor considers in the moment in which he makes a choice between two or more potential opportunities of investment.
The model approach considers the entity of the submerged as a non-observable variable and focuses on its links of cause and effect with a plurality of determinants and indicators (monetary, of the production and of the work) which is possible, instead, to measure empirically.
We have, up to now, spoken of assessments of variables which approximate the influence of the economy on the domestic product.
The Central Statistics Institute (L’ISTAT) using their own methods, indicate statistically the part of the GDP attributable to the area of the submerged economy, making available each year, two assessments corresponding to the extremes of an interval, within which the “exact” value of the phenomenon is considered to be included.
The assessment identifies how much of the Italian GDP is, with certainty, ascribable to the submerged economy (minimum hypothesis) and how much of the GDP is presumably derived from the same submerged economy, but is difficult to measure exactly, given the admixture between problems of a statistical and economic nature from which it originates (maximum hypothesis). According to the most recent ISTAT document on the subject [“The extent of the submerged economy according to official statistics – Years 2000-2006”] (34)
, in 2006, the Value Added Product in the submerged economy resulted as included between a minimum of 15.3% of the GDP (equal to about 227 billion Euros) and a maximum of 16.9% of the GDP (about 250 billion Euros). In 2000, the minimum percentage was 18.2% and the maximum of 19.1% (equal to about 217 billion and 228 billion Euros).
The most marked role in the realization of submerged value added is played by the irregular employment. In February 2010, a Report of the Italian Federation of Trade Unions (UIL) (35)
, analyzing the rate of irregular employment (36)
in 2009 of the 104 Italian Provinces, deduced a “submerged” turnover for the Italian economy of over 154 billion Euros, with an impact on the GDP of 10.3%. According to the UIL, the rate of national work irregularity is attested at 15.6% on the total of the employed (16 workers out of 100) decrease compared to 2008 (-0.4%), with an overall involvement of above 3.7 million workers.
It can be observed from our graphic representation of the ISTAT data (made public last April 14th), how the burden of the non regular employees on the total employment (in %) from 1991 to 2009
is in the primary sector (agriculture, forestry and fishing) equal, in a constant manner over time, to more than double the sum of the secondary sectors (industry) and tertiary (services).
The trend of the series is explicative of the measure approved by the Government, last 28th January, of a special Plan to combat undeclared employment, concentrated on the building industry and agriculture, and oriented to the reinforcement of control and combat in the four Regions most sensitive to the problems of irregular employment (Campania, Puglia, Calabria and Sicily).
The role of the Information Services in the International financial crisis
The enormous importance, attributed by the Government Fiscal Administration, to the emergence of undeclared taxable income represents an important occasion for the economic-financial Intelligence of the Information Services for the Security to furnish a useful contribution to the decisional action of Government in overcoming the critical issues posed by the current negative phase of the international trend.
As discussed during the course of the article, if one considers an excessive public debt as a threat to the National security, the existence of “submerged” conduct (significant for the purposes of tax collection from the submerged producers), could represent a sphere of interest for the economic-financial Intelligence of the Information Services for the Security. Attention could be generally centered on the specific territorial characteristics of the submerged phenomenon in question.
In fact, from the point of view of economic-financial security, the submerged economy represents both a macro and micro-economic phenomenon.
From the micro-economic point of view, the submerged businesses exercise an unfair competition with regard to the regular businesses, creating distortions in the system of prices, among which, naturally, the cost of employment. Furthermore, the failed payment of social contributions and the absence of a Union protection reduce the guarantees of the individual, since the “under the table” workers; de facto, lose all the rights deriving from the possession of a regular work contract, worsening, moreover, the burden of taxation for the regular contributors. At a macro-economic level, the existence of submerged economy implies a distortion in the economic indicators (GDP, rate of unemployment and inflation), impeding a correct evaluation of the state of health of the economy.
The submerged economy affects all social categories. It represents sources of wealth (not only for the criminals, but also for the families and individuals in general) and is the cause of exploitation. It contributes, therefore, to the sustainability of many family budgets and to the construction of a “social security network” alternative to the official one, as well as to the phenomenon of the immigration and evasion.
Its ambivalence, in particular, represents the principal characteristic of its danger, inasmuch as, in this duel meaning, not only immoral elements can be observed, but also elements of help for survival.
The representation of the phenomenon of the submerged economy is a very complex aspect and its dimension can be estimated by analyzing the different forms of fraudulent conduct perpetrated by economic operators to evade the tax and contributory system. The practice of using non-regular workers, for example, is strictly connected to the non-payment of the social contributions. If the employees are non-regular and, therefore, do not result as directly observable, they produce undeclared incomes.
However, the submerged economy concerns not only physical productive activities, but also regards those intangible ones, carried out, for example, by means of the Internet. Recently, the multi-national Symantec observed the growth of the “personal information” market, which deals in credit cards, e-mail addresses or generic data. With just 20 dollars, it is possible to purchase credit card numbers, while lists of e-mail addresses and accounts oscillate between 1 and 20 dollars, reaching up to 850 dollars for banking coordinates.
Also the definition of the cause of the submerged economy is not simple. In fact, there exists a complex tie between the interested parties which often generates an incentive to collude, dividing the benefits of the submerged, which result from non-compliance with the regulations. This conduct is made easier and safer when the monitoring is inefficient and corruption is widespread.
What has been said above translates into a waste of public resources, reducing the quantity and quality of the services that the State can offer. In the monitoring of submerged shares of “value added product”, the financial-economic Intelligence of the Information Services could carry out, therefore, an activity entrusted to it, that is, the search for irregular behaviour which can create dangers for the economic security of the State.