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Italy's shadow economy moves into political spotlight

By Deepa Babington

NAPLES, Italy (Reuters) - In the busy Naples square where she works, 18-year-old Arianna is a familiar sight as she darts back and forth from a cafe bearing trays with espresso and pastries.

With a bright blue apron, lip stud and cheerful smile, she is known to all except the Italian taxman -- for whom the Neapolitan waitress has never existed and probably never will.

Paid 100 euros a week in cash, the high school dropout is one of hundreds of thousands toiling away in a parallel Italian economy where cash is king, contracts or receipts do not exist and the taxman is cut out of the equation altogether.

"Here in Naples, you've got to accept what you get," she said, recalling her start as an irregular worker in a bag factory where she was paid just 50 euros a week.

"They know you're young and need work, so they offer to pay you off the books without any benefits. I'm used to it by now. I don't really hope to ever get a job with a contract."

With Italy fighting to emerge from a debt crisis that could sink the euro zone, Prime Minister Mario Monti is taking aim at these practices in the hope of netting at least part of the 120 billion euros in unpaid taxes of which it deprives the state each year.

The new premier has already promised the state will closely monitor wealth accumulated by Italians to crack down on fraud and lower the limit of payments that can be made in cash.

History, however, is not on Monti's side. Successive governments in Italy have promised, tried and ultimately failed to cripple a flourishing grey economy in a country where dodging the system is often considered a necessity or even an art.

Former Prime Minister Silvio Berlusconi once famously even encouraged workers laid off from carmaker Fiat to seek a job off the books.

Over the past decade, the underground economy has shown signs of shrinking but still accounts for 16.3 percent to 17.5 percent of the overall economy, statistics office Istat says. Other estimates put it as high as 22 percent, second only to debt-choked Greece in the euro zone.

Nowhere is it more on display than in southern cities like Naples, where underground activity of one form or another is so pervasive that a U.S. diplomat in a cable published by WikiLeaks last year wrote of a "culture of illegality" across the Italian south.

Factories in and around Naples churn out fake Fendi and Gucci bags. Traditional coffee bars and restaurants often pay staff in cash, while illegal immigrants hawk cheap scarves and trinkets along a busy road dotted with glitzy stores.

Further down the coast from Naples, poor African migrants pick tomatoes in fields for as little as a few euros a day.

MAKES SENSE FOR ALL

For many in Naples, working in "black" is a way of life.

Sitting outside a cafe along one of the city's many narrow streets, 32-year-old Ivan, who like others interviewed for this article asked that his family name not be used, recounts how his entire 11-year career as a plumber has been off the books. Officially, he's unemployed.

Doing it that way was a no-brainer: getting a work license, giving up nearly half his take in taxes and keeping up with the mass of paperwork and bureaucracy required to stay legal would leave him with virtually nothing, he says.

The way he sees it, everyone involved wins.

"It makes sense for both me and the client," he said.

"The client saves money because you don't have to add taxes, and I save money too obviously."

Working informally, he pockets about 2,000 euros a month. His wife, a domestic helper, also works unofficially, earning 400 euros a month when she isn't busy taking care of their four- and six-year old children.

Sitting across from him at the cafe, his friend Marco flashes a conspiratorial smile when asked which side of the law he falls on.

He did want to be on the right side, he says with a sigh, but realised the economics were against him.

After a series of a low-paid part-time contracts as a gym instructor failed to translate into a steady job, Marco decided it made more sense to work off the books at different gyms when needed, rather than being tied to a contract and schedule.

"Frankly, it's the only choice I have," he said. "They won't give me a full-time job and it doesn't make sense to work part-time for 450 euros a month."

Paid in cash by his clients, he says he now takes home 1,400 euros a month -- a good sum for a few hours' work a day. He can even afford to stay in bed till noon, he said with a laugh.

"Look around you -- pretty much everyone here is working in black in one way or the other," he said, pointing to a stream of people sauntering along the street packed with stores and cafes.

CULTURE OF LEGALITY

A few blocks away in a sumptuous office decked with flags and portraits near Naples' famed opera house, Prefect Andrea De Martino settles into a couch and appears defiant when asked if there is any hope of winning the battle against the likes of Marco or Ivan.

"The culture of illegality can be and is being transformed into a culture of legality," said De Martino, a government-appointed law and order official.

He proffered statistics that he said showed the state was winning the fight -- a recent survey showed 90 percent of companies suspended for hiring workers unofficially have since resumed business fully in compliance with rules.

He dismissed the suggestion that the shadow economy is pervasive, saying an inspection this year of over 6,000 companies in the Campania state that includes Naples showed only about 8 percent of workers were working "in black."

In a drearier office building overlooking a slum, a police official on the frontlines of the battle is less enthusiastic.

About 20 to 25 out of every 100 companies his men inspect end up facing penalties for violating laws on informal workers, said the official, who spoke on condition of anonymity because he is not authorized to speak to the media.

Cracking down is not always easy either -- in tomato fields in the south, for example, migrant workers scatter and melt into the countryside at the sight of police, he said. Their employers can only be booked if an undocumented worker is detained and their personal information recorded, he said.

He said he did believe the rampant illegality could be overcome, but that would involve a cultural change first.

"You have to take out this mentality of illegality if there is to be real change," he said.

"You can't militarize a nation by putting a policeman at every corner to make checks."

THE RICHER SECTION

Workers like Ivan, Marco and Arianna fall under the "poor" section of the shadow economy, says Giuseppe Roma, director of the Censis foundation, who has written a book on the subject.

"This is mainly a sustenance-driven economy, one that is part of the shadow economy because it is not competitive," he said. "It's a very primitive form of an economy."

This poorer section -- which includes workers paid off the books in the agriculture sector and Italians illegally letting out rooms to tourists -- accounts for about 5 percent of the economy and is often seen in the underdeveloped south, he said.

A much bigger chunk of the shadow economy is the "richer" part seen in the country's north -- one of professionals like dentists and doctors who evade tax, and companies that violate rules by paying overtime off the books or failing to issues receipts for some transactions.

The level of illegality also varies sharply by sector, with rates of up to 50 percent in hotels and personal services or as low as 5 percent in the energy sector dominated by large companies, says Enrico Giovannini, president of Istat.

Giovannini says simple measures like lowering the limit for cash transactions from 2,500 euros at present to as low as 300 euros -- among moves Italian media say Monti is considering -- or making certain types of spending tax deductible at the source can be effective in the fight against evasion.

Whether the money recuperated from cracking down on evasion is used to simply reduce the deficit or whether it can be used to lessen the tax burden to reward businesses operating legally is another issue to be considered, he said.

None of this however impresses Neapolitans like Arianna, for whom the battle is entirely theoretical, fought far from the narrow alleys she hurries through each day with a tray in one hand.

"I've always worked in black, I don't think there's any hope of getting a regular job on the books," she said, before rushing back to her employer.

"If I wanted a job contract I would have to leave Naples."

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