The economy remained strong in 2004, fuelled by robust domestic demand. Nevertheless, the general government deficit rose to 6% of GDP. The ending of the Olympic Games related spending, together with a substantial fiscal tightening, is expected to curtail demand in 2005 especially, so that GDP growth may slow to about 3% in 2005-06, though remaining higher than the euro area average. Inflation is also likely to stay above the euro-area average, reducing competitiveness, but even so the current account deficit will gradually decline as the growth differential vis-à-vis the euro area narrows somewhat and service exports remain strong.

The underlying very fragile state of the public finances, revealed by the fiscal audit of public sector accounts going back to 1997, highlights the imperative to implement the recently announced consolidation programme. Cuts in primary spending are required, and recent proposals to modify the tax system should not be allowed to hinder consolidation. Greater labour market flexibility, and strengthened competition in product markets, could help boost both employment and competitiveness, and narrow the inflation gap with the euro area partners.