Germany's Shadow Economy Surges Past €500 Billion

Germany is facing a dual economic landscape, marked by a booming underground economy even as officials welcome a landmark trade deal between the European Union and India. A new study reveals that Germany's shadow economy has expanded to its highest level in over a decade, with undeclared work and illegal activities now valued at over €500 billion.

The Scale of Germany's Underground Economy

A study by financial scientist Friedrich Schneider from the University of Linz and the Institute for Applied Economic Research in Tübingen estimates the value of Germany’s shadow economy reached €510 billion ($606 billion) in 2025. This figure represents a €30 billion increase from 2024.

The report projects continued expansion, forecasting that the shadow economy will grow by another 5.5% to €538 billion in 2026. This underground activity includes income from undeclared work—known in Germany as Schwarzarbeit—and illegal operations like unregulated gambling and certain forms of sex work.

German customs officials, known as Zoll, are tasked with combating the 'Schwarzarbeit' or undeclared work that fuels the shadow economy.

Key Factors Driving Undeclared Work

The study identifies several core drivers behind the growth of the underground economy, linking it to weak performance in the regular economy and rising unemployment. According to the analysis, specific policy changes have also created incentives for undeclared or illegal activities.

These factors include:

• The increase in the minimum wage to €12.82 at the start of 2025, with a further rise to €13.90 scheduled for January 1, 2026.

• An increase in the earnings cap for "mini-jobs."

Schneider suggested that lowering associated costs for employers could be a key strategy to tackle the problem. He argued that current conditions reduce "the income from declared employment," which in turn lowers tax revenue for the state. In contrast, the study noted that a decrease in VAT within the hospitality industry had successfully reduced incentives for shadow work in that sector.

Germany's Shadow Economy in a Global Context

In 2025, Germany's shadow economy was equivalent to 11.5% of its GDP. While significant, this figure remains below the average for 20 major industrialized nations.

However, the rate of growth is notable. Since 2021, Germany's shadow economy has expanded by 2.4 percentage points relative to its GDP. This is substantially faster than the 0.8 percentage point average increase seen across the other industrialized countries during the same period.

Germany Backs New EU-India Trade Deal

In a separate development, German Vice Chancellor and Finance Minister Lars Klingbeil celebrated a new trade agreement signed between the European Union and India.

Klingbeil hailed the deal as a move that "creates new opportunities for growth and good jobs — in Europe and India alike — while deepening the strategic partnership with the world's largest democracy."

Describing the agreement as "a new chapter in European trade policy," the vice chancellor emphasized a strategic focus on transparency and collaboration. "At a time of upheaval, we are consciously focusing on openness, reliability, and strong partnerships," he stated.