When pro-European liberal Rob Jetten defeated the far right to win the Dutch election three months ago, he gave beleaguered centrists across the region cause to hope.  Now, with a coalition deal finally agreed, his incoming government intends to do the same for NATO and the battered transatlantic alliance on which it depends.  That is the pledge from Dutch Foreign Minister David van Weel, who told POLITICO in an interview what the world should expect from the new administration in The Hague, which must oversee one of Europe’s fastest growing militaries, and is a significant NATO contributor within the EU.  “You will have a government that will look at the world as it is and not as it wishes it to be,” Van Weel said this week. “Therefore you will see a government that will still consider NATO to be the cornerstone of our collective security.” But the EU itself will also need to be “stronger” on its own, both economically and in military terms, he said. Van Weel was speaking after a bruising three weeks in which Donald Trump has rocked the foundations of the transatlantic alliance. European leaders are brainstorming ideas for how to survive in a world without American protection — or even friendship.  The damage Trump’s Greenland demands have done to transatlantic trust is real: “I think that is undeniable,” he said. “Let’s hope we don’t see Greenland back on the menu.” Van Weel also regards Trump’s demands for Greenland as a damaging distraction from the urgent task of negotiating peace in Ukraine. “I really regret that this has taken up so much time and effort of so many people in these times when the whole world seems to be on fire,” he said. And, he added: “There’s many other areas around the world that we need to work together in order to achieve something. So whether or not there is trust, I think that is something we need to work on, but we need each other.” NATO OR NOT? The Netherlands, a country of only 18 million people, has pledged to meet the new NATO target to spend 5 percent of GDP on national security. It currently spends around $28 billion a year on defense. That’s a larger sum than all the European Union’s NATO members apart from France, Germany, Italy, Poland and Spain, all of which have populations at least twice the size of the Netherlands’. The previous Dutch government aimed to increase the size of the armed forces from 70,000 personnel to 100,000 by 2030, and perhaps 200,000 in future. Earlier in his career, Van Weel worked with Mark Rutte during the latter’s time as prime minister. Rutte now finds himself in a fight to preserve the transatlantic security alliance as secretary-general of NATO. Rutte caused uproar on Jan. 26 when he warned EU politicians they were “dreaming” if they believed Europe could defend itself without American help. Some of his critics think he is the delusional one if he believes Trump can be relied on. Van Weel thinks both sides have a point. “One, at the moment, yes, we rely heavily on the U.S.. Two, we have to decrease that … And three, that’s also in the interest of a more even and balanced transatlantic bond,” he said. European governments must be prepared to take drastic decisions to boost the region’s defenses, he believes. For example, he is not against the idea of creating a new European Security Council, which would include non-EU countries such as the U.K. “The EU was built from a premise of economic cooperation in order to prevent war and therefore never had a security-oriented structure or aim,” Van Weel said. “The world has changed. The EU needs to play a role in the security realm and therefore you might need to look at structures that we don’t have at the moment.” Russia’s full-scale invasion of Ukraine was “a major wake-up call,” as is the “changing geopolitical situation in general.” He added: “Even if you don’t want to do it [increase defense spending] for NATO, even if you don’t want to do it to please the U.S., you should do it for your own interests. And that’s why I am happy that our own coalition will indeed ensure that we reach the targets for defense spending.”  Van Weel said he hopes that a peace deal for Ukraine is “close,” adding that he was hearing “promising things” from the Ukrainian side about progress. But the big problem is Vladimir Putin, he said, and this is where Trump can help. “We do need the U.S. president to put pressure on Russia to come to the negotiating table to finish this conflict,” he said. “It really is time for peace.” 

President Donald Trump on Tuesday said he has no problem with the sharp decline in the dollar that’s been triggered by convulsions in global bond markets and growing skepticism about the U.S.’s reliability as a trading partner. “I think it’s great,” Trump told reporters in Iowa when asked about the currency’s decline. “Look at the business we’re doing. The dollar’s doing great.” Trump has long maintained that a weaker currency helps industries that he’s seeking to boost — particularly manufacturers, but also oil and gas. And U.S. corporations that export goods and services abroad typically report stronger earnings when they can convert foreign payments into a weaker greenback. But a soft dollar also diminishes the purchasing power of U.S. businesses and consumers and can lead to higher inflation. That’s one reason why Treasury officials, including Secretary Scott Bessent, have historically advocated for a stronger dollar. Some of Trump’s other advisers — including Fed Gov. Stephen Miran, who’s on leave from his role as the president’s top economic adviser — argue that the dollar’s strength in recent years has placed domestic businesses at a competitive disadvantage to overseas-based companies. The greenback was trading at its lowest level in nearly four years before Trump weighed in on its recent declines. After the president’s remarks, its value sank even further against a basket of foreign currencies. Trump’s foreign policy agenda and repeated tariff threats — including his push to acquire Greenland — have amplified a “sell America” narrative that has hurt the dollar and other U.S. asset prices. A possible intervention to prop up the value of the Japanese yen has also pushed down the dollar over the last week.

Europe isn’t doomed to inexorable decline — and in fact is doing better than most people realize, said the IMF’s Kristalina Georgieva. Much of the European Union’s policymaking bubble has been gripped with despair since the bloc’s weakness was exposed during a recent confrontation with the U.S. over Greenland. While U.S. President Donald Trump eventually backed down, the European military response — sending a symbolic handful of soldiers to the North Atlantic island — underlined that had the White House really wanted to seize Greenland, Europeans would have had no choice but to accede. But in an interview with POLITICO, Georgieva, managing director of the International Monetary Fund, said the pessimism was misplaced. In an end-of-year shortlist of top-performing economies put together by the Economist, she noted, the top 10 included seven EU countries, with Portugal in the top spot. The Iberian economy has recorded steady growth while comfortably paying down its debt in the past few years. That’s a fact, she said, that should be celebrated. “Europeans — we are modest people. We don’t brag,” the IMF head stated. She recalled how a U.S. colleague had recently done “something marginal.” “He said ‘oh, let’s look at this. I’m great. I’m fantastic,’” Georgieva recounted. “In Europe you do something great and you say ‘not too bad.’ In this world we are in now, you have to brag a little, exude confidence.” Even before the Greenland standoff, a sense of despair had settled over the top echelons of European economic decision-making. Mario Draghi, former head of the European Central Bank, warned that the bloc faced “slow agony” if it didn’t reform. Georgieva acknowledged the increasingly sharp-elbowed way in which countries now operate — one that leaves little room for multilateral organizations like her own IMF. In a speech earlier on Monday she acknowledged that the world had become “multipolar” — code for a new era of jostling geopolitical blocs that has replaced unilateral American dominance. Speaking to POLITICO, Georgieva said that “geopolitical factors play an increasingly bigger role in defining the world economy.” On Greenland, she said the fact that “allies find it more difficult to retain their sense of common purpose” was a “significant change.” But she insisted that the “destiny of Europe is in the hands of Europeans.” The IMF’s list of advice to reform the EU’s economy echoes Draghi’s own, contained in his competitiveness report from 2024: They include strengthening the single market, cutting regulations on businesses, and integrating the continent’s fragmented energy and financial systems. Mario Draghi, former head of the European Central Bank, warned that the bloc faced “slow agony” if it didn’t reform. | Olivier Matthys/EPA Georgieva said it was “paramount” for the EU to press ahead with reform. “Get your own house in order,” she said. Three of the Economist shortlist’s best-performing countries — Ireland, Portugal and Greece — were put under IMF supervision at the height of the eurozone crisis. There, they had to agree to painful adjustments known as structural reform programs, which included tax hikes and brutal cuts to public services. In the case of Greece in particular, those structural reforms resulted in a sharp increase in unemployment and poverty levels; gross domestic product per capita is still not at its pre-crisis level. But, said Georgieva, their current success is proof that countries, and the EU as a whole, can change their economic trajectories. Asked whether Europe should consider retaliating against U.S. aggression by selling off assets like government bonds, a suggestion included in a recent analyst report from Deutsche Bank, the senior official urged caution. “I would say that the smooth functioning of the international monetary system is of value to all countries,” she said. “Disturbing that smooth functioning of the international monetary system with the same token can bring negative impact.” The Bulgarian boss of the Washington, D.C.-based fund did, however, back a deeper pool of joint EU debt — an idea favored by Draghi but regarded with suspicion by frugal countries like Germany and the Netherlands. As for the disbursement of $8.1 billion in IMF funds to Ukraine to help the country meet its financing needs, Georgieva said she was aiming to hold an IMF board meeting in the second half of `February at which the board could approve the program and start paying out funds. Though the amount is relatively small — less than a tenth of the €90 billion that the EU has agreed to lend to Ukraine — IMF approval is a signal of confidence for financial markets. The IMF chief also said that a meeting “is scheduled” with U.S. Treasury Secretary Scott Bessent regarding the situation in Venezuela, and that it would happen in the “nearest future.” The IMF stopped working with Venezuela in 2019. The fund estimates that the South American country’s economy, battered by U.S. sanctions and plagued by mismanagement, has shrunk to a third of its previous largest size. Since the U.S. captured Venezuelan President Nicolás Maduro at the start of the year, it has floated the possibility of allowing Venezuela to access IMF financing again.

President Donald Trump backed down from the most extreme “Liberation Day” tariffs after bond traders revolted at the prospect of economic upheaval. Now, his push to coerce Denmark into ceding Greenland has threatened to trigger a similar market rout. Bond yields spiked and stocks sank on Tuesday as investors reckoned with how Trump’s threat to impose new tariffs on Europe could hammer alliances that are critical to the global economy. That reignited fears that the “Sell America” trade that dominated market narratives last spring could reemerge, undercutting Wall Street’s hopes for U.S. assets in 2026. As global leaders and top financial CEOs gathered in Davos for the World Economic Forum, where Trump is scheduled to speak on Wednesday, the blowback from bond traders threatened to undermine the president’s bullish case for both the U.S. economy and its market outlook. “The narrative just won’t go away,” said Paul Christopher, head of global investment strategy at the Wells Fargo Investment Institute. Foreign investors flooded back into U.S. assets as tensions eased during the latter half of 2025, but now “they’re hedging because they’re not sure what Trump is going to do with tariffs next.” Trump has historically been highly sensitive to how the bond market responds to his policies, and he regularly cites the stock market’s surge as evidence of how his agenda is working. The latest turmoil has echoes of the volatility that hit global bond markets shortly after he announced eye-popping tariffs last April on dozens of trading partners at a White House press conference. The president later announced a temporary pause on the new import duties after the bond market started “getting a little bit yippy,” in his words. His threat on Saturday to impose more tariffs on Europe sparked a similar response. The Dow Jones Industrial Average fell by more than 870 points on Tuesday. The Nasdaq and S&P 500 both closed down by more than 2 percent — erasing the gains notched through the first three weeks of the year. Yields on the 10-year and 30-year Treasury securities — which are benchmark rates for consumer and corporate lending products — jumped to their highest levels since last September, and the dollar sank. The president warned that he would impose additional 10 percent tariffs on eight European countries that have sought to block his ambitions to acquire Greenland, the sparsely populated Danish territory that’s been a fixation of the president since his first term. French President Emmanuel Macron has said he’s planning to activate the EU’s so-called trade bazooka — the Anti-Coercion Instrument — to respond to Trump’s saber rattling. That would allow the EU to impose restrictions on investment and access to public procurement schemes, as well as limits on intellectual property protection. The White House pushed back on the notion that the markets were rejecting Trump’s policies. “The S&P 500 is up over 10 percent and 10-year Treasury bond yields are down nearly 30 basis points over the past year because the markets have confidence in the Trump administration’s pro-growth, pro-business policies,” White House spokesperson Kush Desai said. “Accelerating GDP growth, cooled inflation, and over a dozen historic trade deals all prove that this Administration continues to deliver for American workers and companies.” Banking leaders — including Bank of America CEO Brian Moynihan, Citi’s Jane Fraser and State Street’s Ron O’Hanley — signaled optimism at the U.S.’s economic outlook in separate media appearances in Davos as they urged government leaders to find a resolution. “Let the people go to work,” Moynihan told CNBC. “They’re here in this beautiful place, and they’ve got a week to a few days to work on it. So, give them 48 hours and see if they can come up with solutions.” Throughout his first year back in the White House, Trump’s costly tariffs and insistence that Europe do more to finance its own defense have caused economic disruption and forced leaders across the continent to reckon with the possibility that the U.S. is no longer as strong a partner as it once was. And while markets have grown increasingly confident that the president’s frequent escalations result in policies that are far less severe than his initial threats, finding an off-ramp in the fight over Greenland’s future could prove challenging. “The market’s very complacent to the idea that this is just a negotiating tool,” said Brij Khurana, a fixed-income portfolio manager at Wellington Management. “I’m more nervous about it because I don’t, I don’t see what the middle ground is here.” In an appearance on Fox Business from Davos on Tuesday, Treasury Secretary Scott Bessent said it’s “very difficult to disaggregate” the market’s reaction to Trump’s Greenland push from a massive sell-off in Japanese bonds that was triggered by mounting concerns about the country’s fiscal trajectory. As European leaders consider taking steps to retaliate against Trump, Bessent urged caution. “Sit back, take a deep breath, do not retaliate,” he said. “The president will be here tomorrow, and he will get his message across.” Aiden Reiter contributed to this report.

WHAT ARE THE ODDS? ANALYZING SIX GLOBAL SCENARIOS FOR 2026.  A series of inflection points await the world. Here’s our view of what might happen next year. By JAMIE DETTMER Illustration by Michael Waraksa for POLITICO Last year, POLITICO chose to be boosterish about the future as it outlined some not entirely tongue-in-cheek reasons for optimism about 2025. Some predictions were spot-on, though others less so: Donald Trump did manage to end (maybe) the war in Gaza, but peace in Ukraine is proving more elusive.   This P28 we’re taking a different tack by offering odds on some 2026 scenarios — from the political survival of both Hungary’s Viktor Orbán and Israel’s Benjamin Netanyahu to the chances of a financial crash and the likely winners of the mid-term elections in the United States.   Is the author prepared to bet his own salary on any of the episodes sketched below? Hell no! The most common mistake when it comes to gambling is to start in the first place. Just ask Harry Kakavas, one of Australia’s smartest real-estate salesmen, who made a fortune selling property on the Gold Coast only to lose tens of millions of dollars at the Baccarat tables.  But if you want to place some wagers, be my guest. There are plenty of online gambling sites that’ll be happy to take your money.   Here’s a caution though. Politics in this topsy-turvy era is even less predictable than sports. And even more so with the ever-unpredictable Donald Trump in the White House. After a whirlwind year at the start of his second term, here’s how we see things unfolding across the globe in 2026.   TRUMP PULLS OFF AN END TO THE WAR IN UKRAINE For all the talk of Western sanctions crashing the Russian economy and bringing the Kremlin to heel, Vladimir Putin seems unperturbed. Regardless of the carnage on the frontlines or Russians queueing for gas because of Ukrainian drone strikes on oil refineries, he has remained fixed on pressing his maximalist demands.   Meanwhile, there are domestic political limits on what Ukraine’s Volodymyr Zelenskyy can agree to without triggering a public backlash.   Nonetheless, Trump often seems more inclined than not to think a deal might be possible. After his Alaska summit with Putin, Trump was heard on a hot mic explaining to France’s Emmanuel Macron that he thinks Putin really wants to “make a deal for me.” “I think he wants to make a deal with me. Do you understand that? As crazy as it sounds,” Trump added.   Of course, the stubbornness of the Russian leader has left Trump frustrated and occasionally musing about whether he’s being played — which is what Melania Trump reportedly thinks Putin is doing.  The Russian leader is adept at stringing Trump along — and his timing is impeccable when reaching out to his US counterpart. Take his two-hour-log phone call last month dangling the prospects of a summit just as Trump hinted he might give Ukraine Tomahawk Cruise missiles.   Arguably, prolonging the war is useful for Putin. It has the benefit of further straining cash-strapped European nations (see below), and risks fracturing the transatlantic alliance. A distracted West also helps Putin’s ally Xi Jinping as he calculates whether, or when, to make a move on Taiwan.  Arguably, prolonging the war is useful for Putin. | Sputnik And Putin’s regime could be imperiled if he ends the conflict abruptly. A rapid shift out of a war economy would likely trigger some dangerous sociopolitical infighting, according to Ella Paneyakh, a sociologist at the New Eurasian Strategies Centre think tank. She says it would spark “cruel and vicious competition for diminishing resources.”  With Ukraine’s severe manpower shortage — Ukrainian units are able to deploy just a dozen troops per kilometer of front — there’s always the chance of a frontline breakthrough. In short, Putin may well calculate he can get more by persisting: more land, Western security guarantees so watered down they’re worthless and a cap on the size of a postwar Ukrainian army. That would handily set the stage for a later resumption of Russian revanchist hostilities.   The counter-argument? The Russian economy is struggling with high interest rates, labour shortages and soaring government borrowing costs. There’s alarm about the bad debt Russian banks are shouldering. The status quo may not be able to last forever. Likewise, though, Ukraine could be on the ropes this winter with Russia’s relentless targeting of the country’s energy infrastructure and the Europeans unable to bankroll Kyiv sufficiently.   Odds: 4/1 2026 IS THE YEAR THE BOND MARKET SAYS ENOUGH IS ENOUGH  Bill Clinton’s campaign guru James Carville once suggested it would be fun to be reincarnated as the bond market. “You can intimidate everybody,” he said.   Even Trump appears to appreciate he’s outranked by the real masters of the universe — the bond vigilantes, hedge and pension fund bosses and high financiers. In the spring he had to pause his signature policy of “reciprocal tariffs” when the bond market frowned.   The awesome collective power of the global investment giants and traders was demonstrated three years ago when they reacted adversely to the poorly sequenced tax-cutting mini-budget of Britain’s Liz Truss. Her premiership was the shortest-lived in British history; Truss’s brief 49 days in office broke the previous record of George Canning, who served for 119 days in 1827 — but he had the excuse of dying on the job.   How many other Western heads of governments might be ushered to the door next year by the bond market as they fail to reduce rising budget deficits?   How many other Western heads of governments might be ushered to the door next year by the bond market as they fail to reduce rising budget deficits? | Timothy A. Clary/AFP via Getty Images The parlous state of public finances — from Japan to Britain and the United States — has kept long-dated borrowing costs at near multi-year peaks this year. The fiscal challenges of high levels of government borrowing, slow growth and sluggish productivity are only mounting. And it is going to be an uphill battle to keep the bond markets reassured.   Demand for government bonds worldwide has cooled with institutional investors put off by the outlook for some major governments being able to maintain their finances, including the United States. “The economic reforms needed to really cover increasing debt are lacking, and the capital market sees that,” Deutsche Bank CEO Christian Sewing said in September.   With its exploding public debt, France has been the canary in the mine with a succession of Emmanuel Macron-appointed prime ministers unable to muster parliamentary — or public — support for serious debt-reduction. Britain is closely following. Financial crisis and political crisis go hand-in-hand, reinforcing and fueling each other. For electoral reasons, governments are equally loath to hike taxes or cut spending, but something has got to give.   Odds: 5/1 NETANYAHU SURVIVES AGAIN They call him “the Magician” for a reason. When all has seemed lost in Benjamin Netanyahu’s long political career, he has implausibly bounced back. “An obsessive, relentless fighter, failure is not a legitimate option for him,” noted one of his biographers, Ben Caspit.   The Israeli leader was first nicknamed “Bibi the Magician” in the 1990s, after beating Shimon Peres in elections held months after the assassination of then-Prime Minister Yitzhak Rabin. Later, few believed he could pull off a win in 2015 given talk of criminal investigations and allegations of breach of trust and bribes. Still, Bibi pulled another rabbit out of his hat and secured reelection by courting the Israeli far right and religious nationalists — a tactic he repeated in 2019 to claw his way back.   The political obituarists were quick to declare him finished two years ago after Hamas rampaged through the kibbutzim of southern Israel. His government was widely blamed for a catastrophic failure to prevent the Oct. 7 attack, seen as the worst security lapse since the 1973 Yom Kippur war that ended the legendary Golda Meir’s career.  They call him “the Magician” for a reason. When all has seemed lost in Benjamin Netanyahu’s long political career, he has implausibly bounced back. | Joe Raedle/Getty Images Parliamentary elections have to be held by October next year. The smart money is on a vote being held sooner, likely Netanyahu’s preferred option. And despite Oct 7 and Netanyahu’s legal travails, he has slowly improved his political position. The rock-bottom poll ratings of his ruling Likud party started to lift after the military campaign against Hezbollah in Lebanon and they continued to rise with the humbling of Iran.   And Trump may have done Bibi a big favor by pushing him into accepting the Gaza peace plan and agreeing to a ceasefire. Netanyahu was able to use Trump as the excuse for halting the military campaign in Gaza, allowing him to overrule the religious nationalists and far-right partners in his rambunctious coalition who wanted the war to continue.  Netanyahu’s political opponents are drawing comfort from the fact that Likud appears to be running short of the 35 seats it secured in the last election. Opinion polls are showing his right-wing coalition would struggle to secure 61 seats in the 120-seat Knesset. But so too would the opposition bloc. And a poll last month for Zman Yisrael, a Hebrew-language media site, suggested Bibi was enjoying increased support in the wake of the ceasefire and hostage release deal. Likud appears on course to once again emerge as the largest party in the Knesset.  The best hope for Netanyahu’s opponents is to unite and offer Israelis a simple choice. That’s the strategy former Prime Minister Naftali Bennett is pursing; he’s wooing Gadi Eisenkot, a former chief of the Israeli Defense Forces, in a bid to shape the election as a head-to-head fight between himself and Bibi. Does Netanyahu have another card up his sleeve?  Odds 3/1 HUNGARY’S VIKTATOR WINS REELECTION Who would bet against Viktor Orbán leading his national conservative party, Fidesz, to another parliamentary victory?  The Viktator — a pun combining his first name and the Hungarian word for dictator — has been victorious in the past last three elections. The bête noire of Europe’s centrists and leftists, they will be determined to see him tripped up this time when Hungarians go to the polls in April, eager to be free of his EU obstructionism.   Who would bet against Viktor Orbán leading his national conservative party, Fidesz, to another parliamentary victory?  | Pierre Crom/Getty Images “The election isn’t going to be hermetically sealed off from the rest of Europe,” chuckles Frank Furedi, who heads the Brussels branch of the Hungarian government-backed college Mathias Corvinus Collegium. Furedi predicts Hungary will be the venue for a massive ideological brawl, further polarizing an already highly divided country.   Trump, MAGA influencers and Orbán’s allies in the Patriots for Europe group will be equally determined to see him remain as prime minister. They’re already drawing comfort, says Furedi, from the result in October of the Czech Republic’s parliamentary election, which saw right-wing populist Andrej Babiš’s ANO party secure a big win. The presidential election victory by a national conservative in Poland this year is also a source of confidence. But even Orbán loyalists don’t doubt this is going to be the toughest election he has faced in the past 15 years with incumbency proving a disadvantage.  And election campaigning is already underway. Péter Magyar, an MEP and former Fidesz insider, is Orbán’s main rival and hopes to capitalize on widespread public dissatisfaction with record inflation, economic woes and a series of political scandals. He’ll hope Orbán fatigue will kick in. His pro-Western and center-right party, Tisza, is running neck-and-neck with Fidesz in many polls, although some independent pollsters reckon Magyar is ahead.   But one in four Hungarians remain undecided. “A bit of trickery and a lot of campaigning” could shift the polls, according to political analyst Péter Krekó of the Budapest-based think tank Political Capital. “Tisza’s lead is not unchangeable.” Orbán is casting Magyar as a puppet of the EU and even a Ukrainian agent of influence who wants to push Hungary into war. He will hope his populist EU-baiting narratives, helped by a media controlled by his friends, shift the focus of the election toward the culture wars. It just may work, again.  Odds: 2/1 A SHADOW BANKING CRISIS ERUPTS And spare a worrying thought for the unregulated private credit market and the so-called shadow banks. The usually staid Governor of the Bank of England, Andrew Bailey, has already tolled the alarm bell.  In October, he warned of parallels with the 2008 financial crash, which was sparked by an American housing bubble fueled by easy credit and the issuance of risky subprime mortgages, with their subsequent bundling into opaque financial products that spread risk throughout the global financial system. Risk turned to contagion.  Governor of the Bank of England, Andrew Bailey, warned of parallels with the 2008 financial crash. | Oli Scarff/Getty Images Will the global financial system once again be brought to its knees? The private credit markets have become a major source of funding for businesses. That’s partly because traditional banks never regained their appetite for riskier lending after the 2008 crisis, and they have also been restrained because of greater regulatory scrutiny.   The hedge funds and private equity firms comprising the shadow banking sector now account for just under half of the world’s financial assets, worth around $250 trillion, according to the US Financial Stability Board.   The good news is that unlike traditional and investment banks they’re not using consumer cash deposits to invest in long-term, illiquid assets; they raise and borrow funds from investors, who in large part agree for their investment to be locked up for long periods. That reduces the short-term risks for the shadow banks — so in theory there shouldn’t be massive runs on them, like, say, what happened to Lehman Brothers in 2008.   But that’s in theory. If the private credit market is roiled, there’s bound to be an impact on other parts of the global financial system. And cash-strapped governments will be in no position to organize a bailout like in 2008, particularly at a time of even greater populist revolt. Furthermore, shadow banks have bet heavily on AI — and the AI boom might be a bubble ready to pop. It might soon be time to take cover.  Odds 3/1 DEMOCRATS VS. REPUBLICANS It will be a tall order for the Republicans to retain control of the House of Representatives.   The incumbent president’s party invariably loses control of the House in the midterms — only twice since 1938 has that not been the case. “Both exceptions reflected unusual circumstances,” according to William A. Galston of the Brookings Institution, a centrist think tank.   It will be a tall order for the Republicans to retain control of the House of Representatives.  | Visions of America/Universal Images Group via Getty Images In 2002, President George W. Bush’s Republicans surfed a rally-round-the-flag wave following the 9/11 attacks; and in 1998, Bill Clinton’s Democrats benefited from the unpopular effort by Republicans to impeach him.  Complicating the task for Democrats next year is a controversial redistricting scheme pushed by Trump in Texas and other states that should net Republicans additional seats, though some of that will be offset by Democrats redistricting in California. Nonetheless, with Republicans only enjoying a slim majority in the House, Democrats have to be odds-on favorites to win back control, especially if Trump’s net approval rating remains negative. In a reassuring sign for the party, Democrats scored big wins in gubernatorial races in New Jersey and Virginia in November.  The Senate is another matter. The GOP has a six-seat majority currently, and they’re playing on much safer turf. Although they will be defending 22 seats next year compared to the Democrats’ 13, most of their incumbents are considered secure. Only one Republican senator is running in a state that voted for Kamala Harris in last year’s presidential election. Two Democratic incumbents will be running in states that Trump won last year.   All in all, Republicans in the Senate look to be in a much stronger position than their counterparts in the House. For Democrats to win the Senate would require a giant wave of anti-Trump fervor sweeping into even some of the most conservative states in the country. It’s unlikely, but stranger things have happened.  Democrats seize the House: 2/1 odds; Republicans keep the Senate: 2/1 odds  

Follow all the action on POLITICO’s live blog here. BRUSSELS — Seven hours into a make-or-break summit in Brussels, national leaders and senior EU officials remained locked in a series of intense separate talks as they tried to resolve their differences over how to fund Ukraine. With EU governments talking up the risk of failure to get agreement to underwrite a €210 billion loan for Kyiv, European Commission President Ursula von der Leyen insisted she would “not leave the summit without a solution.” That looks easier said than done. Agreeing on how to pay for the loan has been a nut that’s proved nearly impossible to crack in the run-up to the summit despite ― or perhaps because of ― almost non-stop diplomatic back-channelling since leaders failed at the first attempt at a summit two months ago. By 6 p.m. on Thursday, some officials talked cautiously of progress. Two senior EU officials with knowledge of the deliberations told POLITICO they were now slightly more optimistic that the contours of a deal could be worked out on Thursday night ― or at least in the early hours of Friday. Others continued to play down any such breakthrough. Leaders ripped up their plans almost immediately on Thursday morning. They decided to discuss minor items on their agenda ― including EU enlargement and the bloc’s next seven-year budget ― to allow their aides to get down to business on Ukraine throughout the day. The EU didn’t “want leaders to be wasting time in putting a comma here or a full stop there, but to get on with agreeing the one big thing that still requires a decision,” a senior EU official said. Leaders’ sherpas — their most trusted aides — held discussions in small groups behind closed doors while separately technical-level envoys were tasked with redrafting the proposals. While that was going on, the prime ministers and presidents left the main summit table to drop in and out of these smaller huddles. They took an unscheduled break after lunch to check in on progress with their teams. RUNNING OUT OF MONEY For weeks, politicians have been unable to agree on which version of a financing plan they want. Belgium, in particular, has been opposed to the main plan of using Russian assets frozen in Europe. Belgium, which hosts the bulk of the funds and fears it is especially exposed to legal action or reprisals from Moscow, has consistently opposed the move. Despite weeks of painstaking negotiations over the assets, efforts to bring Belgium around appeared to be backfiring this week, according to officials. The country adamantly opposes using the Russian money held by Euroclear in Brussels, and has now attracted allies, including Italy, the bloc’s third-largest country. The so-called frugal countries reject any alternative plan, such as raising a joint loan between all EU countries. That idea has for years been anathema to the northern member countries, who have been unwilling to underwrite bonds for highly indebted southern countries. Germany and its allies warn there is still no alternative to targeting the Euroclear money. A deal is urgent because without it, Ukraine will run out of money in April and will be forced to cut spending, four years into its war with Russia. “The decision must be made by the end of this year,” Ukrainian President Volodymyr Zelenskyy told reporters at the summit, adding that his country would have to begin reducing the number of drones it produces if the EU money fails to materialize. Diplomats and officials who spoke to POLITICO insisted the Russian assets proposal was the only option on the table. Part of the problem is managing relations with Belgian Prime Minister Bart De Wever, who has won domestic plaudits for his stance. Three diplomats with knowledge of the talks said they feared the Flemish nationalist has reached a point where he cannot back down and will need to show he has won major concessions. “The question then is whether De Wever has made the mistake of positioning himself to be staunchly against the deal,” to the point where he can’t turn it down despite securing major concessions, said an EU diplomat. HUNGARY’S VETO The Commission, which has taken the lead on drafting the texts, held direct talks with Belgium Thursday in an effort to reassure the country that sufficient protections and risk-sharing measures are in place. But, at the same time, Belgium, Italy and others who have voiced concerns about the loan began a guerilla offensive to try to build consensus in favor of the EU issuing joint debt to finance Ukraine, diplomats said. Pursuing the join debt option requires unanimity — meaning that Hungary’s pro-Russia Prime Minister Viktor Orbán could veto the scheme. Supporting Kyiv with joint debt “a very bad alternative,” Lithuanian President Gitanas Nausėda told reporters. “It would require unanimity … and that could of course potentially run into resistance from Hungary.” “There is talk in the corridors that Hungary is floating some proposals.” European Council President António Costa has been unequivocal that a decision will be taken before anyone can leave for the holidays. “Costa is a master of exhaustion tactics,” said a senior diplomat. “You’ll be locked in meetings till very late at night and he’ll say ‘let’s have breakfast,’ making it clear there’s no end in sight until there’s a deal. And when people are running around with pieces of paper, it’s hard to say no to anything.”

Christmas is still more than a week away but Spanish parents working for the EU in Brussels are already furious about next year’s school holidays. They’re angry because the European school system is planning to change its Christmas holiday dates for 2026-27, meaning children would have to go to class on Jan. 6, one of the biggest holidays of the year, when the Three Magic Kings (Reyes Magos) bring gifts. The European Schools have told parents that the holidays will run from Dec. 18, 2026 to Jan. 4, 2027, meaning children will be at school on Jan. 6. The parents want the holidays to run from Dec. 23 to Jan. 6 inclusive. But those calls have been in vain. The secretariat general that manages the European School system “has minimized the impact of the conflict, pointing out that the holiday could be addressed in the classroom as cultural content,” according to a note circulated among parents.  The secretariat general of the European Schools did not respond to a request for comment in time for publication. “These celebrations form part of our cultural and educational identity, and eliminating them sends a message of disconnection from deeply ingrained traditions with undeniable emotional value for families,” said a parent, who asked to be identified only by the initials A.J.C.  “This decision has a direct and very negative impact on work-life balance, as it drastically reduces the actual time our children, as expatriate families, can spend in Spain, Italy or Portugal with their grandparents and relatives. It unjustifiably limits one of the few periods of the year when it is possible to strengthen these essential family bonds.” Spanish parents have sent a letter to the country’s permanent representation to the EU asking for help, and gathered signatures from MEPs this week to send a letter to Piotr Serafin, the European commissioner for budget and public administration. The letter, seen by POLITICO and bearing 38 signatures, asks Serafin to officially recognize “the special relevance of Three Kings Day for Spanish families” and to “adopt a solution consistent with the founding principles of cultural diversity and mutual respect between Member States.”

LONDON — David Cameron wrongly refused to give the intelligence powers watchdog access to security documents while he was foreign secretary, a new report shows. Details revealed by the office of the Investigatory Power Commission (IPCO) — which oversees the powers used by Britain’s intelligence and investigatory agencies — show that in July 2024, Cameron refused to allow the watchdog to view top-level information as he believed “the documents fell outside [its] remit.” The IPCO said this was the first time it had been refused access to a document by “any public authority” and “took this extremely seriously to avoid a disturbing precedent being set,” adding that the incident risked undermining trust in the oversight of the powers of Britain’s intelligence services. The annual report, published on Tuesday, said the watchdog had been made aware of documents referenced in “section 7 Intelligence Services Act 1994 (ISA) authorisations” — known as “James Bond” licenses, which allow ministers to approve the overseas conduct of intelligence officers that would otherwise be unlawful. The commissioner, Brian Leveson, “personally reviewed” the matter and concluded that Cameron had “erred in his analysis of relevance and remit.” The watchdog then submitted a formal request to the new foreign secretary, David Lammy, following the 2024 general election, to review the case under its “powers to compel disclosure of documents.” The documents were handed over in September 2024. “This episode involved a departure from the highly transparent manner in which the FCDO normally engages with IPCO and we are confident lessons have been learned,” the report said. “It should serve as a reminder to all public authorities of the importance of absolute transparency in maintaining public trust and confidence when it comes to the oversight of covert powers: it is for IPCO to determine the relevance of documents and we will pursue any instance of non-disclosure using all means available to us.” The Foreign Office refused to comment when approached by POLITICO. David Cameron and David Lammy were both approached for comment.

The Bank of England is set to cut interest rates on Thursday, after lower-than-expected inflation figures and signs of a weakening jobs market. Headline inflation slowed to 3.2 percent in November, from 3.6 in October, the Office for National Statistics said on Wednesday. That was the lowest since March and a much clearer drop than predicted by analysts, who had forecast a rate of 3.5 percent. “A cut tomorrow should be a no-brainer, with another to follow in February,” Peel Hunt chief economist Kallum Pickering said via social media, pointing to “No growth since summer, a labor market that is rapidly cooling, and a big downside surprise to inflation across the board in November.” The news comes only a day after labor market data from the ONS showed the unemployment rate rising to its highest level in over four years in October. The economy has struggled for growth in the second half of this year, after a sugar rush in the first quarter in which exporters rushed to get their goods to the U.S. before President Donald Trump could impose trade tariffs. The hangover from that — and the lingering uncertainty over the global economic outlook caused by Trump’s trade policy — has been severe. But at the same time, an unwelcome rise in inflation has stopped the Bank of England from cutting interest rates more quickly to support the economy. A raft of hikes in government- controlled prices such as energy bills and rail fares meant that inflation was rising for much of the year, leading it to peak at 3.8 percent in September. That was also partly due to companies passing on increases in labor costs due to a 6.7 percent hike in the National Living Wage and an increase in employers’ National Insurance contributions. Panmure Liberum chief economist Simon French said the wide range of goods and services now showing softening price trends showed that demand is now so weak that companies are having to absorb those price increases themselves instead. The government will be particularly relieved to have seen politically sensitive food prices, which have been a constant bugbear for the last couple of years, making the biggest contribution to the slowdown in inflation in November. Prices for clothing and footwear and for discretionary services such as restaurants and hotels also fell slightly. “As Christmas gifts go, this is a most welcome one,” said Danni Hewson, head of financial analysis at AJ Bell. “It’s the time of year when people put a few more things in their supermarket trolley, so news that food and alcohol inflation has fallen will be a boon for cash-strapped families.” The Bank has consistently said that inflation would fall once those factors passed out of the annual calculations, given that the underlying weakness of the economy. However, with the worst bout of inflation in half a century still fresh in everyone’s minds, it has been forced to keep the pace of policy easing “gradual and cautious”. Peel Hunt’s Pickering said that the scale of the slowdown could be enough to have some members of the Monetary Policy Committee voting for a half-point cut in the Bank Rate to 3.5 percent on Thursday. However, the consensus remains for a quarter-point cut to 3.75 percent. The pound still fell over half a cent against the dollar in response to the numbers, as traders penciled in more scope for easing next year, while the government’s borrowing costs in the bond market also fell.

LONDON — In February Britain’s cash-strapped Labour government cut international development spending — and barely anyone made a noise. The center-left party announced it would slice the country’s spending on aid down to only 0.3 percent of gross domestic income — from 0.5 percent — in order to fund a hike in defense spending. MPs, aid experts and officials have told POLITICO that the scale of the cuts is on a par with — or even exceeding — those of both the previous center-right Conservative government or the United States under Donald Trump. This leaves Britain’s development arm, once globally envied as a vehicle for poverty alleviation, a shadow of its former self. The move — prompted by U.S. demands to up its NATO spending, and mirroring the Trump administration’s move to gut its own USAID development budget — shocked Labour’s progressive MPs, supporters and backers in the aid sector. But unlike attempted cuts to British welfare spending, the real-world backlash was muted, with the resignation of Britain’s development minister prompting little further dissent or change in policy. There was no mutiny in parliament, and only limited domestic and international condemnation outside of an aid sector torn between making their voices heard — and keeping in Whitehall’s good books over slices of the shrinking pie. Some fear a return grab over the aid budget could still be on the cards — but that the government will find that there is little left to cut. Gideon Rabinowitz, director of policy and advocacy at Bond, the U.K. network for NGOs, warned that, instead of “reversing the cuts by the previous Conservative government, Labour has compounded them, and lives will be lost as a result.” “These cuts will further tarnish the U.K.’s reputation as it continues to be known as an unreliable global partner, breaking Labour’s manifesto commitment,” he warned. “The Conservatives started the fire, but instead of putting it out, this Labour government threw petrol on it.” ‘IT WAS THE PERFECT TIME TO DO IT’ When Prime Minister Keir Starmer announced the cut to international aid — a bid to save over £6 billion by 2027 — Labour MPs, including those who worked in the sector before being elected, were notably silent. The move followed a 2021 Conservative cut to aid spending — from 0.7 percent in the Tory brand-rebuilding David Cameron years down to 0.5 percent. At the time, Labour MPs had met that Tory cut with howls of outrage. This time it was different. Some were genuinely shocked, while others feared retribution from a Downing Street that had flexed its muscles at MPs who rebelled on what they saw as points of conscience. “No one was expecting it, so there was no opportunity to campaign around it,” said one Labour MP. “Literally none of us had any idea it was coming.” Remaining spending is largely mandatory contributions to organizations such as the World Bank. | Daniel Slim/AFP via Getty Images The same MP noted that there are around 50 Labour MPs from the new 2024 intake who had some form of development background before coming into parliament. Yet they were put “completely under the cosh” by Downing Street and government whips. “It was the perfect time to do it,” the MP said. A number of MPs who might have been vocal have since been made parliamentary private secretaries — the most junior government role. “They have basically gagged the people who would be most likely to be outspoken on it,” the MP above said. The department’s ministerial team is now more likely to be loyal to the Starmer project. “I just felt hurt, and wounded. We were stunned. None of us saw it coming,” said one MP from the 2024 cohort, adding: “They priced in that backlash wouldn’t come.” But they added: “If we were culpable so were NGOs, too inward-looking and focused on peripheral issues.” The lack of outcry from MPs would, however, seem to put them largely in step with the wider British public. Polling and focus groups from think tank More in Common suggest that despite the majority of voters thinking spending on international aid is the right thing to do in a variety of circumstances, only around 20 percent of the public think the budget was cut too much.  The second new-intake Labour MP quoted above said the policy was therefore an “easy thing to sell on the doorstep,” and “in my area, there’s not going to be shouting from the rooftops to spend more money on aid.” DIMINISHED AND DEMORALIZED The cuts to aid come at a time when Britain’s Foreign Office is undergoing a radical overhaul. While the department describes its plans as “more agile,” staff, programs and entire areas of focus are all ripe for cuts to save money. The department is looking to make redundancies for around 25 percent of staff based in the U.K. MPs have voiced concern that development staff will be among the first to make the jump due to the government’s shift away from aid. The department insists that no final decisions have been taken over the size and shape of the organization. Major cuts are expected across work on education, conflict, and WASH (Water, Sanitation, and Hygiene.) The government’s Integrated Security Fund — which funds key counter-terror programs abroad — is also looking to scale back work abroad which does not have a clear link to Britain’s national security. The British Council — a key soft-power organization viewed as helping combat Chinese and Russian reach across the world — told MPs it is in “real financial peril” and would be cutting its presence in 35 of the 97 countries it operates. The BBC’s World Service is seeing similar cuts to its global reach. The Independent Commission for Aid Impact (ICAI), the watchdog for aid spending, is also not safe from the ax as the government continues its bonfire of regulators. The FCDO did not refute the expected pathway of cuts. Published breakdowns of spending allocations for the next three years are due to be published in the coming months, an official said. A review of Britain’s development and diplomacy policies conducted by economist Minouche Shafik — who has since been moved into Downing Street — sits discarded in the department. The government refuses to publish its findings. Aid spending was spared a repeat visit by Chancellor Rachel Reeves in her government-wide budget last month — but that hasn’t stopped MPs worrying about a second bite. | Pool Photo by Adrian Dennis via Getty Images The second 2024 intake MP quoted earlier in the piece said that following the U.S. decisions on aid and foreign policy “there was an expectation that the U.K., as a responsible international partner, as a leader on a lot of this stuff, would fill the gap to some extent, and then take more of a leadership role on it, and we’ve done the opposite.” NOTHING LEFT TO CUT Aid spending was spared a repeat visit by Chancellor Rachel Reeves in her government-wide budget last month — but that hasn’t stopped MPs worrying about a second bite. While few MPs or those in the aid sector feel Britain will ever return to the lofty heights of its 0.7 percent commitment, they predict there will be harder resistance if the government comes back for more. “I don’t think they’re going to try and do it again, as there’s no money left,” the second 2024 intake MP said. But they pointed out that a large portion of the remaining aid budget is spent on in-country costs such as accommodation for asylum seekers. Savings identified from the asylum budget would be sent back to the Treasury, rather than put back into the aid budget, they noted. Remaining spending is largely mandatory contributions to organizations such as the World Bank or the United Nations and would, they warned, involve “getting rid of international agreements and chopping up longstanding influence at big international institutions that we are one of the leading people in.” The United Nations is already facing its own funding crisis as it struggles to adjust to the global downturn in aid spending. British diplomat Tom Fletcher — who leads the UN’s humanitarian response — said earlier this year that the organization has been “forced into a triage of human survival,” adding: “The math is cruel, and the consequences are heartbreaking.” The government still has a commitment to returning to 0.7 percent of GNI “as soon as the fiscal circumstances allow.” The tests for this ramp back up were set out four years ago. Britain must not be borrowing for day-to-day spending and underlying debt must be falling. The last two budgets have forecast that the government will not meet these tests in this parliament. FARAGE CIRCLES In the meantime, Labour’s opponents feel emboldened to go further. Both the Conservatives and Reform UK have said that they would further cut the aid budget. The Tories have vowed to slice it down to 0.1 percent of GNI, while Nigel Farage’s Reform UK is eyeing fresh cuts of at least by £7-8 billion a year. A third 2024 Labour MP said that there was a degree of pressure among some colleagues to match the Conservatives’ 0.1 percent pledge. Though no country has gone as far as Uganda’s Idi Amin in setting up a “save Britain fund” for its “former colonial masters,” Britain’s departure on international aid gives space for other countries wanting to step up to further their own foreign policy aims. The space vacated by Britain and America has prompted warnings that China will step in, while countries newer to international development such as Gulf states could try and fill the void. Many of these nations are unlikely to ever fund the same projects as the U.K. and the U.S., forcing NGOs to look to alternate donors such as philanthropists to fund their work. “There’ll be a big, big gap, and it won’t be completely filled,” the second new intake MP said. An FCDO spokesperson said the department was undergoing “an unprecedented transformation,” and added: “We remain resolutely committed to international development and have been clear we must modernize our approach to development to reflect the changing global context. We will bring U.K. expertise and investment to where it is needed most, including global health solutions and humanitarian support.”