Sex, drugs and accounting for GDP in Europe

By Leonid Bershidsky

Europe has a new source of economic growth. In the next few months all European Union countries that do not already include drugs, prostitution, and other illegal and gray-market businesses in their gross domestic product calculations will have to do so.

The 2010 version of the European System of Accounts becomes obligatory for GDP reporting by EU member states in September. It states unequivocally that «illegal economic actions shall be considered as transactions when all units involved enter the actions by mutual agreement. Thus, purchases, sales or barters of illegal drugs or stolen property are transactions, while theft is not."

The ostensible goal is to make countries' economic data comparable. Relatively permissive EU members such as Germany, Hungary, Austria and Greece, where prostitution is legal, already include the revenue it produces in their national accounts. Other countries with more prudish laws have been denied a statistical bonus. The same goes for drugs: Some of them are decriminalized in the Netherlands -- and have long been included in the GDP calculation -- while other countries have shied away from doing this, to their own statistical detriment.

Italy already includes much of its shadow economy in its GDP figures, but will now have to go further. Adding drugs, prostitution, and black market alcohol and cigarettes could increase Italy's GDP by as much as 2 percent, according to Eurostat. In this way, Italy's hookers and drug addicts would help Italian Prime Minister Matteo Renzi bring Italy's budget deficit below the euro area's statutory 3 percent of GDP. They would also help him to meet requirements to show declines in Italy's debt to GDP ratio, which continued its steep rise to 132.6 percent as...