Activity has been more resilient in Spain than in most other European Union countries. While foreign demand has suffered from weak activity in Europe and the appreciation of the euro, buoyant consumption and construction demand have sustained growth. Meanwhile, inflation has moderated, partly due to the euro appreciation, although a significant but shrinking inflation differential with the euro area persists. Growth should progressively accelerate to 3 per cent by 2005, with a more balanced contribution across demand components. In 2004, the government foresees a balanced budget once more, thus complying with the Fiscal Stability Law. The fiscal stance will be broadly neutral, which is appropriate given the resilience of the economy and the relatively relaxed monetary conditions. Reforms to improve flexibility in wage bargaining and to further raise competition in sheltered sectors would contribute to reducing the inflation differential with the euro area...