SWOT cent years, leading some parts of EU-CEE to become net immigration countries, significant labour and skills short­ages persisted in the pre-pandemic period. Eurostat pro­jections suggest that working-age populations will shrink precipitously in the coming decades. There is probably no solution to this; EU-CEE countries will have to learn to live with it. Increased unit labour costs driven by shortages is a particular problem for a region where cheap workers have formed a key pillar of the growth model until now. High emigration rates of qualified workers(both blue and white collar) are a particular problem. Over-specialisation in production: EU-CEE countries are functionally specialised in relatively low-value production and have struggled(with a few limited exceptions) to pro­gress towards headquarters functions, where more value is created. Except for Croatia, Latvia, and Lithuania, EU-CEE countries have a specialisation in production that is far above what would be predicted by their income level. However, the region has few multinational firms, particularly in manu­facturing. Our findings suggest that this over-specialisation in production shows few signs of changing and may even be becoming stronger. The fact that EU-CEE countries trade predominantly with the most highly developed countries in Europe(e.g. Germany), means that it is particularly difficult for them to change their functional specialisation pattern. Slow adaptation to structural change in the automo­tive industry: The region is heavily exposed to the for­tunes of the German automotive industry in particular, which has been buffeted by the diesel emissions scandal, structural change in demand, and tougher environmental standards. This combines with local challenges to automo­tive production, including shortages of skilled labour and rising unit labour costs. In the Czech Republic, Hungary, Romania, and Slovakia, the automotive sector accounts for an unusually high share(by EU or global standards) of both production and employment. EU-CEE’s specialisation in production rather than headquarter services means that it is less insulated from change and has less influence over it. low scores for various metrics of digitalisation. Across EU­CEE, the rural/urban divide in terms of internet access is bigger than for the EU as a whole, and especially in Bulgar­ia, Romania, Croatia, and Slovenia. Labour shortages have created particular difficulties for firms seeking ICT special­ists in the Czech Republic, Hungary, and Slovenia. Some have weak education systems: Croatia, Bulgaria, and Romania are more than 10 percent below the OECD aver­age for PISA scores, especially for maths. Romania, Bulgar­ia, Latvia, and Hungary have a share of STEM graduates well below the EU average. 4.3 OPPORTUNITIES Building on existing success in the pharmaceutical industry: The Visegrád countries appear to have bucked the functional specialisation trap in the case of the phar­maceutical industry. This could be an interesting avenue for further expansion in higher-value headquarter services. Near-shoring potential: It is likely that EU-CEE will bene­fit from some near-shoring in the coming years, although hopes in this direction may be higher than justified by real­ity. At least some German firms are likely to reassess ex­tended supply chains in light of the pandemic. Available surveys seem to show that if near-shoring happens, it will be in the direction of EU-CEE. Attraction of further FDI in the service sector: Hunga­ry, Poland, Estonia, and the Czech Republic have relatively high shares of professional, scientific, and technical activi­ties in FDI(in the range 7–9 percent). Specialisation in these types of services could promote technological leap-frog­ging. Poland has become a key European centre for the outsourcing of services. The current pandemic has shown that a much larger share of work in the services sector can be done remotely, which could benefit EU-CEE countries that already have a strong start in attracting services FDI. Low levels of R&D: Total business expenditure on R&D is roughly equal to the EU average in Slovenia and below the EU average in all other parts of EU-CEE. The EU’s Innovation Scoreboard shows a clear East-West split, with Estonia be­ing the only EU-CEE country classed as a Strong Innovator. A long way to go in the green transition: Despite some progress, EU-CEE countries are on average much more car­bon- and resource-intensive than the EU-15. Moreover, they rely to a greater extent on fossil fuels for energy. Ener­gy efficiency is around 20 percent below the pre-2004 member states, and several EU-CEE countries are not on track to meet the 2030 Energy Efficiency targets. In Poland, 75 percent of energy production comes from coal. Only 6 percent of materials in EU-CEE are recovered and returned into the economy, compared with 11 percent in the EU15. All EU-CEE countries except Slovenia and the Czech Repub­lic are below the EU average on the Eco-Innovation Index. Digital deficiencies: Bulgaria and Romania have particularly Opportunities for the digital economy in the pan­demic: The current pandemic produced a unique positive shock for the digital sphere, with large swathes of the economy being moved online almost overnight in Spring 2020. This accelerated the adoption of digital technologies across a host of sectors, including education, public servic­es, and banking, and acted as a stress-test for connectivity infrastructure, employee skills, and organisational process­es. Both employee digital skills and firms’ digital capabili­ties will be upgraded as a result. The EU’s Recovery and Re­silience Facility(RRF) could provide significant funds in this direction, especially in countries with particularly high allo­cations as a share of GDP, such as Croatia and Bulgaria. The positive shock to the digital economy may well be the most lasting legacy of the current pandemic crisis. The digital shock may change the economic geography of Europe, re­ducing the importance of proximity to Germany in a way that could benefit countries such as the Baltic States, Ro­mania, Bulgaria, and Croatia. 49