DO YOU pay tax on your nanny’s salary and did your builder charge VAT when he repaired your roof? If you didn’t and he didn’t (and you should have done) the Office of National Statistics and Eurostat, the statistical office of the European Union would like to know about it.

And while you are in confessional mode, they would also like to know how much cocaine you consume in an average week, the price per gram and the frequency in which you visit prostitutes. In the latter case, officials would be pleased to receive details of the precise nature of the sexual service provided and the amount charged.

There is no immediate cause for panic (and I am sure few readers of these pages engage in the latter two activities) as these inquiries are statistical in nature. Eurostat is on a drive to improve the collection of data on economic activity in member states and the ever-compliant Swedes are creating a special unit in the Swedish statistical bureau to find out how much Swedes spend on vice. The unit will attempt to investigate the supply side of the vice equation: how many prostitutes, how many tricks?

The problem with the black or “non-observed” economy, as the prim practitioners of the dismal science refer to it, is that it is mainly secret. Its true scale is unknown but there are extraordinary estimates: Eurispes, an Italian think-tank reckoned that underground business activity in Italy was worth €300 billion £207 billion) in 2003, equivalent to 27 per cent of the country’s GDP. The Eurispes figures tally with earlier calculations by the International Monetary Fund which said that between 1999 and 2001, as much as a third of the Italian workforce was working off the books. Even greater percentages are estimated for Greece and when you shift your gaze to the emerging economies of the former Soviet block, the non-observed economy reaches the scale of the legitimate economy.

Statisticians have a simple enough reason to want to record this activity — consistency in data. In the Netherlands, prostitution is legal and the wealth generated is recorded. In other member states it remains prohibited, however, and if comparisons of GDP among EU states are to be meaningful, all productive activity (that which involves a willing buyer and seller) must be recorded. Britain has begun to make a stab at recording the trade in smuggled booze and ciggies but dealers, pimps and prostitutes remain off the books. Germany and Finland have begun to make an attempt to record such activity but most EU states have not even started.

Why bother? An “exhaustive” measure of GDP may be good statistics but there is never an economic number without a political axe grinding in the background. Europe’s GDP, its wealth per capita and the growth or lack thereof is of huge political significance.

It is the extent to which Europe lags the US that chafes and rubs raw the skin under the collars of the chief ministers of the European economies. Per capita, Americans earned $35,000 in 2002 while the eurozone countries, adjusted for purchasing power parity, earned $24,000 and grew at almost half the rate. Britain is earning about the same per head, although growing faster.

So, the underground economy becomes interesting. Is it a hidden world of entrepreneurs, a dynamic economy that escapes the taxman but generates extraordinary wealth? The “criminal” underground is a small portion of the whole, probably accounting for about 1 per cent of GDP. Most of the underground is tax evasion, unreported turnover, moonlighting in the cash or barter economy.

America’s black economy is reckoned to be about 9 per cent of GDP, a third of Italy’s and the relatively smaller tax burden suffered by Americans is widely attributed by many to be the reason for the relative scale of the non-observed Italian and American economies.

Work like a trojan in your official job and you will be little better off. Skive and work in the black economy and you will end up better off.

It is no accident that most black economy activity is in the services sector. Only last week, the Governments of France and Germany combined forces to defeat an attempt to open up services to competition by virtually scrapping the Services Directive. They feared an influx of highly competitive service providers from the Eastern accession states, offering low-cost, low-wage skills to Western consumers.

They need not have bothered to scupper the directive. The services are already provided: nannying, cleaning, plumbing and building. It is called the black economy, non-observed but highly effective, underpaid and unprotected. Such a success for President Chirac and Chancellor Schröder.

carl.mortished@thetimes.co.uk

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