Sustained by the persistent dynamism of domestic demand, activity should accelerate to over 3% by 2006. Net exports, however, are likely to remain a drag on activity. Inflation may moderate slightly after the pass-through of the oil price hike but should remain about one percentage point above the euro area average.

Although the neutral fiscal stance is currently appropriate, a tighter fiscal policy would be desirable in the medium run to reduce domestic demand pressures and prepare for the fiscal consequences of population ageing. Further pension reforms also need to be considered. Continued efforts to improve productivity growth and a reform of the wage bargaining system would help to halt the deterioration in competitiveness.