This research examines the shadow economy’s impact and implications on the economic development at the level of the European Union, from 2009 to 2020, employing the MIMIC Model. The statistical analysis has revealed two contradictory outcomes, which also reflect the suppositions that were found in the literature. Namely, the shadow economy and economic development are at the same time strongly correlated, whilst also being weakly correlated, strictly depending on the chosen variables. Therefore, from a statistical point of view, we conclude that the shadow economy directly impacts economic development, but there is a lack of transparency on behalf of the European Union member states when providing data related to the informal sector. However, by employing the MIMIC model, we discovered that the causes leading most to work in the informal sector are the lack of quality in public administration institutions and reduced government efficiency, which at least theoretically, affects the economic development of any country. The paper contends that, with a strong framework of public policies, the size of the shadow economy can be diminished.