EU governments should use a carrot-and-stick approach to fight the shadow economy by lowering taxes and increasing enforcement, the European Commission said in a report on Thursday.
The EU's executive estimated that workers who pay no taxes generate up to 15 percent of the bloc's gross domestic product.
The report written by independent experts said that the 15 countries of the EU should lower taxes, increase surveillance and sanctions, simplify rules and cooperate with each other to help fight the problem.
"Member states must increase efforts to quantify undeclared work, cut it down and to transform it into regular employment," Employment Commissioner Anna Diamantopoulou said in a statement about the study.
The survey, which focused on seven EU states, showed that the shadow economy accounted for 27.2 percent of GDP in Italy, 23 percent in Spain, 19.5 percent in Sweden, 14.8 percent in Germany, 14.7 percent in France, 13.8 percent in the Netherlands and 13 percent in Britain.
Agriculture, personal services such as cleaning, construction, manufacturing and -- to a lesser degree -- retailing, transport and tourism are the areas most affected, the report said.
The report said that a shadow economy is damaging because it deprives governments of tax revenues and poses a threat for the social security system because undeclared workers do not pay pension and health care premiums.
People who perform undeclared work -- often uneducated and long-term unemployed, frequently recent immigrants -- jeopardize chances for a good pension.
The report did not say it, but in some countries -- such as Belgium -- the cost of moving a worker from the shadow economy to the official economy can double the hourly cost to an employer.
The Commission consulted experts across the EU when estimating the size of the shadow economy.
"It is fiendishly difficult to arrive on one method and to build a model which takes into account all the factors," Andrew Fielding of the Commission said on Thursday.