Output accelerated during the second half of 2003, driven by buoyant domestic demand.Inflation has drifted down in recent months partly due to the appreciation of the euro, while the inflation differential with the euro area has fallen to ½ percentage point. Activity should continue to firm over the projection period and should grow above potential despite the negative drag of the external sector. With monetary conditions likely to remain relaxed and the output gap closing, the authorities should avoid any fiscal stimulus. This would imply a widening budget surplus over the projection period because of positive cyclical effects. Labour market reforms should aim at increasing wage flexibility, which would also boost productivity performance...