Spain's shadow economy flourishes in downturn

Every day at 6am Carlos Gonzalez, who moved to Spain from Peru in 2004, arrives at the Plaza Eliptica in southwestern Madrid, a meeting place for electricians, plumbers and other construction workers looking for work in Spain's underground economy.

"Many of us had contracts at good companies but now this is all that is left for us," said the 35-year-old, who has struggled to find stable work since Spain's decade-long property bubble burst in 2008.

A van pulls up and several job seekers surround it. After a brief negotiation two men board the vehicle leaving the other candidates behind.

"We have to survive because we have children and apartments to pay," Gonzalez said.

Spain's shadow economy -- where cash is king, there are no contracts and the taxman is cut out of the equation -- is flourishing amid an economic downturn that has pushed the jobless rate to 26 percent.

Economists estimate Spain's underground economy equals 25 percent of the country's gross domestic product.

The parallel economy "unfortunately is a longtime problem" in Spain, which "has worsened due to the economic crisis", said Santos Nogales of the UGT, Spain's second-largest labour union.

"Undeclared work does not distinguish between nationalities. It touches immigrants and many Spaniards," he added.

Viorel Draghici, a 40-year-old Romanian tiler, said he was recently paid €50 a day under the table over four days working to renovate someone's bathroom.

In his previous position running his own building company, he would have charged €1,000 for the job.

"They take you and they pay you by the day. There are no contracts," nor any social security, he said at the Plaza Eliptica.

He was luckier than most in his position.
 

"Generally they pay you between €25 and 30 for a full day," said Gani Saroj, a 40-year-old Moroccan.

Beside him another man was selling coffee for 50 cents a cup to the job seekers gathered at the square.

The amount of cash transactions carried out behind the taxman's back have risen by €15 billion per year since 2008 to hit nearly €253 billion in 2012, according to a study by the tax inspectors' union Gestha.

The real estate boom that went bust in 2008 "boosted the black economy and fraud, since many transactions were done in cash with €500 notes," said the report.

Undeclared work is a fourth pillar of support for many families scraping by with handouts from relatives, charities and shrinking welfare benefits, it added.

This underground economy deprived state coffers of 85 billion euros in 2012 alone, said Gestha president Carlos Cruzado.

At that rate, it could more than offset spending cuts and other austerity measures which the government has imposed, projected at €150 billion over three years between 2012 and 2014, he added.

Spain's tourism sector, which is enjoying good times as the country received a record 60.6 million foreign visitors last year, is a prime example of the problem, said Nogales of the UGT union.

"Activity is up but the number of contracts does not increase," he said.

Many tourism sector workers are on the books as part-time workers when they actually work full-time, "up to 45 hours per week", with most of their salaries paid under the table, he said.

But in a country with over five million people unemployed, the government prefers to "bury its head in the sand" because these under the table payments "could explain why there is no explosive social climate in Spain", Nogales said.

For Cruzado, the president of the tax inspectors' union, the main problem lies elsewhere.

In 2010 "we arrived at the conclusion that over 72 percent of the total amount of fraud was carried out by big companies and wealthy families," he said.

Larger companies use more sophisticated and complex mechanisms to avoid paying taxes, which make it harder for tax inspectors to detect irregularities, according to Gestha.