As outlined in Chapter 1, the main challenge facing macroeconomic policy is that of successful entry to the euro area. Not only do the assessment criteria on inflation, deficit and long-term interest rates have to be met but the authorities also need to avoid entry to Exchange Rate Mechanism (ERM II) at an inappropriate exchange rate. Furthermore, all these objectives need to be met without severe short-run costs in terms of economic output. In fiscal policy a patchy track record in deficit discipline has been seen in recent years, particularly in 2002, and the authorities have yet to make substantial inroads in reducing the overall size of government spending in GDP. Monetary policy has recently been distracted from inflationary goals and markets have found it difficult to read its current strategy...