The economy is recovering from three years of stagnation during which domestic demand eclined by about 2 per cent. Investment activity, in particular, firmed in the second half of 2003 and destocking slowed considerably. Growth is projected to pick up further in 2004, driven by strengthening exports. As the upswing broadens in 2005, GDP is likely to grow at around 2 per cent, which would be above potential. The general government deficit is likely to remain above 3½ per cent of GDP this year but to fall back to 3.1 per cent in 2005. Significant progress has been made in structural reform. Legislated measures to be phased in comprise, inter alia, an easing of employment protection, a reform of unemployment related benefits to improve job search incentives and some easing of requirements for setting up handicraft business. While steps have been taken to curb long-term expenditure increases, further expenditure reforms are required to reduce the structural deficit in a sustainable way...