Growth has stalled, reflecting a slowdown in exports. A moderate pick-up in growth is projected to begin towards 2014 as external demand and confidence recover. Unemployment is set to rise, but then to stabilise as demand picks up. Core inflation will remain above the euro area average, driven by the backward-looking wage indexation mechanism.
Fiscal consolidation should continue to help restore the sustainability of the public finances. However, the government has significant fiscal space and there is no need for additional consolidation if growth is weaker than expected in the government’s fiscal plan. Continued strong financial supervision and stronger financial regulations in line with EU and international initiatives is important to monitor and contain financial sector risks. Structural reforms to enhance work incentives, reduce barriers to competition and improve the education system would enhance growth potential.