Policy proposals 5 POLICY PROPOSALS This paper has shown that much of EU-CEE has achieved significant convergence with Western Europe over recent decades. The sophistication of the Czech manufacturing sector, the level of EU transfers received by Hungary, the convergence performance of Poland, or the technological strides made by Estonia would all be the envy of most non­EU countries in CESEE. Any realistic counter-factual for EU­CEE during these years is probably worse than what hap­pened. Nevertheless, as we outlined in the Introduction and Chapters 2, 3, and 4 of this study, the current growth model may well have run out of steam, especially for the more developed parts of the region. Moreover, the region faces a large number of exogenous challenges in the short, medium, and long-term. This final section of our paper looks at various possible pol­icy solutions. We do not argue that the current setup should be abandoned completely; rather, we posit that it should be rethought and reformed in a way that both makes signifi­cant and quicker convergence more likely, and which best helps the region to meet the challenges and threats of the global economy. Completely abandoning the current mod­el within the EU is unfeasible, and any proposal along the lines of quitting the bloc could hardly be taken seriously. driven a potentially game-changing shift in fiscal policy. Particularly German support for a EUR 750 billion fund, financed by common borrowing and over half of which is in the form of grants, is a major step in terms of both scale and risk-sharing in the EU. Many EU-CEE countries will benefit disproportionately from this. However, it re­mains to be seen how permanent these fiscal and mon­etary developments will be. EU-CEE countries must use their weight to contribute positively to these debates within the EU. Poland is itself an important country; col­lectively, EU-CEE has a powerful voice. – Run the domestic economy»hot«: Even if a change at the EU level doesn’t become permanent, EU-CEE countries have some domestic policy levers they can use. Those with monetary flexibility should be relaxed about periods of above-target inflation and keep real rates low or negative with a target of full employment. Current long-term rates on public debt for EU-CEE countries are at historically low levels in both real and nominal terms. As long as the ECB keeps its own rates low(which seems very likely), there are few risks to loose monetary policy in EU-CEE. 5.1 CHANGE THE DEBATE AT THE EU AND LOCAL LEVEL Step 1 is to contribute to changing the debate at the EU and local level around macroeconomic policy, both fiscal and monetary. The architecture of the EU, for example, via the Stability and Growth Pact, enforces insufficient de­mand, particularly at times of economic weakness more generally(Heimberger 2020). As we outlined at the begin­ning of this study, any reforms that EU-CEE countries un­dertake to adapt their growth model to the conditions of the new global economy will be much easier if aggregate demand is higher. EU-CEE countries should: – Be a constructive voice for permanent change in the EU’s fiscal stance: This may be easier now than in the past, with even the IMF calling for loose fiscal policy to mitigate the current crisis(IMF 2020). As outlined in the introduction, the euro area crisis forced a big change in monetary policy at the ECB, and the current crisis has 5.2 FOCUS ON WHERE EU-CEE HAS ESCAPED THE SPECIALISATION TRAP, DEVELOP A NATIONAL INNOVATION SYSTEM, AND BUILD AN ENTREPRENEURIAL STATE Perhaps the most concerning finding in this paper is that EU-CEE has an extreme level of specialisation in industrial production, way above what would be predicted given its development level, and that there are few signs of diversi­fication. EU-CEE lacks activity in more the profitable and secure headquarter, R&D, and post-production functions. We identify this as a type of trap that leaves the region ex­posed to competition from lower-cost locations. Realisti­cally, the functional specialisation trap cannot be broken, or at least not quickly and decisively. Rather, countries should focus on: – Make the most of areas where the trap has been broken: Our findings in this paper show this to be particularly true in the pharmaceutical industry. 51