GED Under the Radar – August Edition

Every month there are some economic stories that fall through the cracks. In this segment,  the GED Team will present to you those economic stories, which we found most interesting each month but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group of few, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

August’s Radar Stories in Short:

• 130 years “Made in Germany” – A success story with an uncertain future?
• What do we know about Greece’s growing shadow economy?

130 years of Made in Germany – A success story with an uncertain future?

On the 23^rd of August 187 the British Parliament passed the “Merchandise Marks Act”, stipulating that all products from other countries should be labeled as such, clearly indicating the origin of the good. The intention behind the law was to save Britain from inferior quality imports as especially knife manufacturers in Britain at the time were complaining about cheap imitations from Germany. The label “Made in Germany” was born.

What started out as a warning label, however, soon turned into the opposite as the now quickly industrializing Germany of the late 19^th and early 20^th century started to export goods of better and better quality, in many areas even surpassing their British counterparts. “Made in Germany” became a guarantee for quality and reliability around the world and after the second world war it was products like the VW Beetle, “Made in Germany”, that became the symbol of the Germany post war economic wonder and helped make the country into the export juggernaut it is today.

As most products nowadays are not completely produced in just one country anymore questions have arisen what exactly it means for a good to be “Made in Germany” and indeed there is no precise definition for the label. Still producers cannot just use the quality seal however they like and have to be able to defend their product before court showing that a sufficient percentage of the product was indeed produced in Germany allowing the court to rule on a case by case basis. This way the label has been able to retain its prestige throughout the decades and so in March the Statista Made-In-Country-Index (MICI) 2017 put Germany on the top spot among 48 other countries plus the EU in their index, labeling “Made in Germany” the most respected label in the world.

“Made in Germany” indeed has been a global success story. But can it remain on top forever? Currently, Germany’s “Dieselgate” is shaking up consumer confidence in German cars around the globe. The revelation that German car manufacturers might have colluded amongst each other for over a decade to fake permitted emission standards hits especially hard, as the German car is right at the heart of what is perceived to be “Made in Germany”. In the end, it is simply too early to tell how significant the impact of Dieselgate will really be for the German quality label. Still it seems clear that German producers will have to come up with a good way to regain some trust among global consumers, should they want to see Germany atop next year’s Made-In-Country-Index as well.

Is Greece’s growing shadow economy a cause for concern?

A country’s overall economic activity is most commonly measured in its GDP, the combined value of everything produced, sold and consumed in that economy. Not every transaction finds its way into this calculation however. The sum of all economic activities in a country that occurs “off the books” therefor makes up what is commonly called that countries shadow economy. Such transactions, usually practiced to avoid taxation or to circumvent standard business practices, can range from paying a carpenter or a maid in cash to money laundering and counterfeiting. Not every country’s shadow economy is equally widespread however. New research by the German Institute for Applied Economic Research (IAW) earlier this year compared the shadow economies of a range of selected countries and found that Greece currently boosts the largest informal economy amongst developed countries with a shadow economy 21.5 percent the size of its GDP, followed closely by other southern European economies.

Greece’s Shadow Economy Observatory at the University of Macedonia has since updated the calculations in their own ongoing report on the matter and found an even greater shadow economy of nearly 24 percent the size of Greece’s GDP. Among with that estimate the so called “Thales” study also gave us an intriguing look behind the factors and motivations driving the Greek shadow market. Roughly 65 percent of all Greeks participate actively in the shadow economy in one form or another. That number rises to nearly 72 percent among the unemployed. Of those that do consciously participate in it 82 percent justify their actions due to a poor return on a high tax burden, 77 percent mention the unfair distribution of said taxes and 72 percent  the low quality and quantity of public services.

While Greece’s large shadow economy along with those of other southern European countries like Italy and Spain was largely born out of the global financial crisis and the subsequent Euro crisis, large shadow economies are not a phenomenon limited to current times or any single location. The added global shadow economy is estimated to be worth a total of $650 bn. While on the surface rising numbers are therefore a bad sign for countries as their governments are missing out on large quantities of tax revenues, it has also been argued that shadow economies can be essential in creating business and boosting innovation where there has previously been none and that attempting to limit a country’s shadow economy could in fact limit economic growth. But whether Greece’s government will try to eliminate the country’s abundance of undeclared business or attempt to profit from it, it seems clear that current labor and fiscal policies are at least partially flawed and a fresh revaluation of the economy’s current situation is needed.