Growth slowed to 2 per cent in 2002, due to weaker private consumption and investment and sluggish foreign demand, but growth has remained higher than the euro area average. Inflation has declined rather little and the differential with the euro area persists. Activity should strengthen from the second half of this year, halting the rise in unemployment, with GDP likely to grow above potential in 2004.

In early 2003 a personal income tax cut was implemented, while the new Fiscal Stability Law entered into force, which obliges all levels of administration to aim at a balanced budget. The fiscal stance is, nevertheless, broadly neutral, which seems appropriate in view of the relatively small negative output gap. The inflation differential should be tackled by structural reforms rather than by tightening fiscal policy, most importantly by changes to the wage bargaining system to reduce nominal wage rigidities and by further enhancing competition in certain sectors.