The world’s advice for U.S. voters—and the next White House.

I have a confession to make. I feel a sense of paralysis in these weeks leading up to the U.S. presidential election. Whether it’s the fate of Ukraine, peace in the Middle East, competition with China, or the broader question of America’s role in the world, too much is riding on who will be the next occupant of the White House. A Donald Trump presidency would be very different from a Kamala Harris one, and polls continue to show Americans are bitterly divided on how to choose between them. Key players in global crises, from Russian President Vladimir Putin to Israeli Prime Minister Benjamin Netanyahu, seem as if they are waiting to see who wins before they make their next big move. Perhaps that’s why it’s so difficult to cast beyond Nov. 5 and imagine how a range of conflicts and issues may play out.

Four years ago, our Fall 2020 print issue tried to examine what we called “The Most Important Election. Ever.” Little did we know we’d find ourselves at a similar crossroads in 2024. Yes, Harris has replaced U.S. President Joe Biden at the top of the Democratic ticket, but many of the issues at stake—for the United States and the world—remain the same. Columnist Michael Hirsh wrote a cover essay for us about 2020; we asked him this time around to contrast the visions presented by Harris and Trump.

But back to that paralysis: What happens after Nov. 5? For starters, there’s little guarantee the U.S. public will respect the results of the election. Even if you imagine a point in the future where Americans agree on who will lead them for the next four years, the question is how the next president should unite a polarized electorate and what issues they should prioritize.

That’s a dilemma we wanted to address in our cover package, “Dear America.” Nine distinguished thinkers with lifetimes of experience in global policymaking have written nonpartisan letters of advice to the next White House—and to Americans. With the United States no longer the world’s sole hegemon, each of them considers how Washington should approach the critical challenges our planet faces.

The political scientist Joseph S. Nye Jr., who popularized the term “soft power” in this magazine more than three decades ago, explores how the next president can restore U.S. standing in the world. “Political values attract only if a country lives up to them,” he writes. “Preaching democracy abroad will be judged by how well it is practiced at home.” Arancha González, a former Spanish foreign minister, builds on that with a call for “investing in a shield that would protect and preserve democracy for future generations.” Such a task, she argues, will require strengthening election systems, regulating social media, and bolstering cybersecurity.

The Nobel-winning economist Joseph E. Stiglitz makes the case for following the rules. “[W]e have an international trade order that enforces rules against the poor and weak … but in which the United States can do as it will,” he writes, referring to how Washington has strong-armed the World Trade Organization to serve U.S. interests. Mark Malloch-Brown, a former U.N. deputy secretary-general now based in London, argues that “what’s good for the United States is more than ever not always good for the rest of the world. … There is a dangerous divergence.” The solution, Malloch-Brown says, is for Washington to reverse its current multilateral posture and become more of a team player. It’s a sentiment echoed thousands of miles away in Singapore, from where the scholar Danny Quah calls the United States out for its “obsession with being No. 1” at the cost of global stability. “We want America in our world—just as we want China in it, too,” Quah says.

Our letter writers don’t always agree with each other. But we felt they all had one thing in common from their many years in public policy: a deep love for America and a desire to see it become more of a force for good. Other contributors include Nirupama Rao, a former Indian foreign secretary; Catherine Ashton, a former EU foreign-policy chief; Martin Kimani, a former Kenyan ambassador to the United Nations; and Jason Bordoff, a former energy policymaker in the Obama administration. The next White House—and American voters—would do well to heed their advice in mulling the difficult choices ahead.

There’s lots more in this issue, including a unique ranking of the world’s best international relations programs. No one can predict the state of the world in 2025, but here at Foreign Policy, we can at least help the next generation of policymakers figure out where to go to school.

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The conversation between former President Donald Trump and Vice President Kamala Harris begins at 8 PM CT.

In Philadelphia Tuesday night, both former President Donald Trump and Vice President Kamala Harris are looking to make their mark on history in a city bursting with it.

When the presidential debate kicks off, it will be the first – and perhaps only – conversation between the two major party candidates.

“People are waiting to see how Kamala will do,” said University of Texas at Tyler Professor of Public Administration Dr. Ken Wink. “I think they’re also waiting to see if Trump can defend his record as president.”

“I think Kamala Harris wants to show that Trump doesn’t have the temperament to be president, and Trump wants to show that Kamala Harris is not really qualified in a sense of being president based on her past performances,” Wink added.

The economy has consistently polled as an important issue for voters in this year’s election, and the Biden administration has faced criticism over its handling of the economy particularly after inflation hit a four-decade high in 2022.

“Harris has to be able to articulate that the worst is behind us in terms of the economy and yet we all still feel the effects of inflation, there’s no doubt about that,” said Wink. “I think that is the big policy issue that could go either way and both candidates need to do well on that issue.”

When asked during an interview with CNN late last month about her policy shifts, Harris said her “values have not changed.”

“That is an interesting quote, and I wonder if Trump will attack her truthfulness or veracity on those changes of issue positions,” said Wink.

Trump has questioned Harris’ racial identity, after expressing doubt over former President Barack Obama’s country of birth.

Criticism from the Democratic Party persuaded President Joe Biden to drop out of the race following June’s presidential debate in Atlanta.

“If people can see a pretty clear winner, and the polls swing, you know, as much as two percent toward one candidate or the other, that could very well be decisive in the election.” Wink added.

He also said that the vote share from third party candidates could impact the race, even though Robert F. Kennedy Jr. is no longer seeking the White House.

56 days remain until election day. Early voting in Texas begins on Oct. 21, and the last day to register to vote is Oct. 7.

Source

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The new policy platform on the Harris campaign’s website comes 50 days after Biden exited the race.

Vice President Kamala Harris’ campaign just released a new page on its website titled, “Issues,” which includes a 23-point policy platform that comes following weeks of criticism over its absence. 

Pressure has been building on the Harris campaign to put up a policy platform on its website, similar to how former President Donald Trump and others have done in the past. Upon its release this week, however, the platform was met with even more criticism over a lack of specifics.

In particular, one conservative immigration hawk took issue with the policy platform’s failure to clarify Harris’ stance on border wall funding, and whether she still views illegal border crossings as a civil enforcement issue — or rather, a criminal one.

“The Harris campaign finally has an ‘Issues’ page, but — on immigration, at least — there’s no there, there,” Mark Krikorian, the executive director of the Center for Immigration Studies, told Fox News Digital. “She doesn’t say if she’d build more border barriers. She doesn’t say whether she still wants to decriminalize border-jumping. The statement just repeats the vacuous nonsense about the ‘bipartisan’ Senate border bill, which was drafted by the Biden-Harris DHS to codify its unlawful schemes to import more illegal aliens.”

Despite indicating a potential Harris-Walz administration would “bring back the bipartisan border security bill,” the new online policy platform did not indicate where Harris stands on funding additional border wall construction. Republicans have pointed to Harris’ public support for the failed bipartisan border bill as evidence she now backs a border wall after once calling it a “medieval vanity project.” 

But Harris campaign officials have said the border bill did not include any new money for border wall construction — it just extended the timeline to spend funds appropriated during Trump’s last year as president. The bill, however, has limits to ensure the money is spent on border barriers.

“Americans should believe Harris’ prior statements and current policies as Vice President,” Lora Ries, director of the Heritage Foundation’s Border Security and Immigration Center, told Fox News Digital in a statement Tuesday. “She has previously stated numerous times that she opposes a border wall. And on day one of the Biden-Harris Administration, they halted construction of the border wall system.”

Meanwhile, while running for president in 2019, Harris indicated during a nationally televised debate that she would not go after illegal border crossings. In a segment on ABC’s “The View,” she reiterated her stance in a riff with the late-Sen. John McCain’s daughter, Meghan. 

“I would not make it a crime punishable by jail,” Harris said. “It should be a civil enforcement issue but not a criminal enforcement issue.”

“Harris repeatedly said during her CNN interview that her values have not changed,” Ries highlighted in her statement to Fox News Digital. 

Fox News Digital reached out to the Harris campaign for comment on the criticism from Krikorian and others about a lack of specifics in its new online policy platform, but did not receive a response.

Trump campaign spokesperson Karoline Leavitt called the new policy platform “a late-night, half-ass, wish list of policies.” 

“If Kamala really wanted to lower costs and secure the border — why did she cast the tie-breaking vote to cause inflation and support the war on our energy industry, and why is she allowing an invasion of illegal immigrants through our southern border as we speak?”

Not long after the Harris campaign’s “Issues” page was added to its website, social media users pointed out that the new web page contained metadata with language urging voters to reelect President Joe Biden, according to The New Republic. The Biden language was quickly removed, but not before leaving the impression that the Harris campaign copied and pasted from Biden’s documents, the outlet reported.

Source

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The economy, a key issue for voters as the November 5 presidential election draws nearer, will have a starring role in the debate tonight between the two candidates, Democratic nominee Kamala Harris and her Republican rival, former President Donald Trump. 

About 8 in 10 adults tell CBS News that the economy is a major factor in their choice at the polls, outpacing issues such as abortion and climate change. 

Each candidate will seek to convince voters that their proposals will lead to better economic conditions, ranging from bigger paychecks to lower inflation. And CBS News polling shows that Trump may have an edge with inflation-weary consumers, with about 4 in 10 voters saying prices are likely to go down if he wins — twice as many as those who believe the same would be the case with a Harris victory. 

“[I]nflation and the high cost of living are deeply impacting lower- and middle-income Americans,” said Liza Landsman, the CEO of Stash, a financial services firm that polled consumers ahead of the debate, in a statement. “What the study did shed sharper light on is how vastly different individuals’ perceive their economic condition depending on their political view.”

For instance, about 7 in 10 Trump supporters told Stash they are deeply concerned about inflation, compared with 2 in 10 Harris voters, the study found.

Economists largely rate the current economy as good, albeit with some weak spots, such as a slowing labor market. But about 42% of Americans incorrectly believe the U.S. is currently in a recession, down from about 48% last year, a new MassMutual survey found. 

“Sometimes it is difficult to separate out various doom-and-gloom factors when it is hitting your wallet directly,” Paul LaPiana, a certified financial planner and head of brand, product and affiliated distribution with MassMutual, told CBS MoneyWatch.

Even so, a number of Wall Street economists are predicting that Harris’ policies are likely to result in stronger economic growth for the U.S., while warning that Trump’s combination of tariffs and tax cuts could both spur inflation while causing the deficit to mushroom by trillions. 

Here’s what to know about three key economic issues that could influence voters. 

Inflation and grocery costs

Inflation has sapped household budgets since 2021, when prices started rising due to the impact of the pandemic, which disrupted global supply chains and prompted the federal government to pump trillions into the economy. (Both Presidents Trump and Biden signed large spending bills into law during the pandemic, authorizing stimulus payments and extra unemployment aid, among other supports).

To temper inflation, the Federal Reserve responded by hiking interest rates to their highest point in 23 years. That’s paying off, with government data on Wednesday expected to show that inflation cooled to 2.6% on an annual basis in August, its lowest since March 2021, according to financial data firm FactSet.

But lower inflation doesn’t mean that prices have come down; instead, it simply means that the rate of price hikes have moderated from their pandemic peak. 

The candidates are likely to discuss their plans to address inflation, which remains a key issue for voters given that grocery costs remain 21% higher than they were prior to the pandemic. That means a cart of groceries in 2020 that cost $150 would now set you back by $182, or $32 more at the register.

Harris has vowed to tackle grocery costs by enacting the first federal law against price gouging by food suppliers and retailers. But economists say they’re skeptical such a law could make much of an impact. 

Trump, meanwhile, has pledged to end the “inflation nightmare.” But his policies, which include adding tariffs to all imported goods, would likely fuel inflation and reverse some of the progress of the last two years, some economists say.

What the candidates are pledging on taxes 

Both Harris and Trump have already made some tax pledges, with Harris vowing to increase the corporate tax rate and Trump proposing a steep cut, taking it down to 15% from its current 21%. 

Trump also wants to extend his Tax Cuts and Jobs Act — his 2017 law that reduced tax rates for most individuals but provided the biggest benefits to the nation’s richest families. Many of those cuts are due to expire at the end of 2025. Trump’s vice presidential running mate, JD Vance, has also floated the idea of a bigger Child Tax Credit.

Harris, meanwhile, wants to enact more generous tax benefits, such as a $6,000 Child Tax Credit for parents of newborns and a bigger Earned Income Tax Credit. One analysis from the nonpartisan Penn Wharton Budget Model found that her proposals would help more low- and middle-income families than Trump’s.

“If Democrats sweep, personal and corporate taxes and benefit spending will likely rise,” Goldman Sachs analysts said in September 3 research report. “If Republicans sweep, they will likely stay mostly unchanged.”

Housing and the American Dream 

Housing remains out of reach for millions of Americans who are now priced out of home-buying due to high mortgage rates and housing prices. 

Harris has proposed providing $25,000 in down payment assistance for Americans who have paid their rent on time for two years, with more support for first-generation homeowners. She’s also proposing tax incentives for builders of starter homes, with the goal of widening the housing supply and lowering home prices.

Trump, meanwhile, has proposed making federal land available to help with housing supply, but his campaign hasn’t offered any details. He’s also vowed to deport between 15 million to 20 million undocumented workers, which he’s blamed for increasing housing demand and pushing up prices.

But the surge in home prices preceded the recent jump in undocumented workers, the New York Times reported. And deporting so many workers, many of whom work in construction, could jeopardize the workforce that builds homes. 

Source

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The debate was heavily focused on US domestic matters—even when questions were on international affairs, both candidates sought to bring the issues back to domestic politics and policies.  

Of most relevance to Australia was the lack of interest in this region. Other than passing references—in heavily political contexts—neither the media nor the candidates raised China in any meaningful way. Notwithstanding the conflicts in Europe and the Middle East, China is the most significant issue globally. 

Without China being prioritised by the two candidates or media today, we can only hope that the next administration will be struck by the realities of Beijing as the pacing military and technological threat to our livelihoods and way of life. Australia and partners like Japan, the Quad and NATO, will need to work together to ensure the next administration is focused on competing with and countering China, and does so by viewing China as a strategic rival first and not as an economic partner. 

Given the next president will immediately face a world in conflict, a further debate that is limited to foreign policy and held before the November election would be best for both US voters and America’s partners. 

On China—Bethany Allen, head of program for China investigations and analysis, and Daria Impiombato, analyst 

While the moderators never asked about China, the topic came up unprompted within the first few minutes of the debate with Harris accusing Trump of inviting ‘trade wars’ but then adding the former President ‘sold us out’ to China. In a sense this focus was not surprising because the Trump administration’s tough turn on China was one of the most significant and controversial foreign policy shifts of his term. The Biden-Harris administration has also made competition with Beijing a key platform. 

More surprising was that, other than brief references, the issue of how to manage China strategically and in the context of potential flashpoints such a Taiwan and the South China Sea did not come up at all. 

Harris and Trump went on to spar over tariffs, microchips and the pandemic response, with Harris accusing the Trump administration of allowing the sale of chips to China that served to modernise the People’s Liberation Army. Trump’s retort that the US ‘barely make any chips anymore’ and that it is Taiwan instead that’s selling them to China again demonstrated the economic lens with which he views these issues.  

This is in line with his latest stances on Taiwan, as he has repeatedly stated that the island should pay the US to defend it, and that they have ‘stolen’ the chip manufacturing business from American companies. Harris, instead, opted to focus on the CHIPS Act and her intention to win the competition with China especially on technology and artificial intelligence. 

On Alliances—Eric Lies, analyst 

What stood out, in particular for US allies the world over, was Trump’s refusal to answer the question as to whether he believes Ukraine should win in the war against Russia. Instead, he repeatedly stated that he would end the war as president-elect. A key element of deterrence is convincing potential adversaries that if they choose violence, they will be met with resolve. Responses like Trump’s, which put Ukraine and Russia on a false equivalence, corrode that confidence in US security promises and will likely make allies in the Indo-Pacific nervous, while emboldening China’s revanchist activities. 

In contrast, Harris unequivocally stated her support for allied efforts within Europe, and how she intends to continue those efforts should she be elected. It meant that a clear foreign policy difference came through between the two candidates—a more isolationist, transactional foreign policy on the one hand and an alliance-driven policy on the other.  

On Ukraine and China—Malcolm Davis, senior analyst 

On Ukraine, Harris clearly demonstrated that she understood the potential implications of a Russian victory in Ukraine. Noting that if such an outcome were realised, ‘Putin would have his eye on the rest of Europe’. This is an accurate interpretation of the stakes at play. In contrast, Trump failed to deliver a convincing response, simply saying ‘he’d get on the phone to Putin and Zelensky’. 

The risk is therefore that a second Trump Administration could reduce support for Ukraine and increase the likelihood of delivering Putin a decisive strategic victory. 

On China, both candidates avoided any real discussion of the defence and national security implications of a rising China. Instead, they focused on trade relations. Whichever candidate wins in November, however, there is a chance that they will be confronted with a major crisis with Beijing over Taiwan. This is an issue that is far more important to the United States than tariffs. 

Generally, the debate avoided any real discussion on critical and emerging technologies and the importance of maintaining US leadership. In fact, as the ASPI Critical Technology tracker shows, China now holds a dominance in high-impact research that was once held by the US. Both candidates should have dealt more with this important issue and will need to do so as president. 

On Disinformation and Migration—Mike Copage, head of the Climate and Security Policy Centre 

As the world grapples with the prospect of AI driving mis and dis-information in democracies, the debate highlighted how vulnerable American political discourse has become to the spread of disinformation without it. Pressed by moderators that there’s no evidence to back claims by vice-presidential candidate JD Vance that Haitian illegal immigrants are eating pets in Springfield, Ohio, Trump responded that he knew it was true because he heard it from ‘people on television’. While ridiculous at face value, the real and serious consequences of a former President and current candidate repeating clearly false, racist and anti-immigrant claims cannot be ignored. The violence perpetuated following the spread of anti-immigrant misinformation in the United Kingdom demonstrates how far that can lead without responsible leadership. 

On the Media and China—Greg Brown, senior analyst, Washington DC 

Harris had a solid showing defined by poise without policy articulation. Her supporters will feel emboldened by the strategy to distance herself from the present Administration—noting during the debate that she was neither Joe Biden nor Donald Trump. 

President Trump had a weaker night—notwithstanding his zingers like ‘wake the President (Biden) up at four o’clock in the afternoon’—and appeared rambling at times. He missed opportunities to attack Harris effectively. 

As usual, the debate moderators (in this case ABC News) and voters were the losers.   

The lone foreign policy issue mentioned with any repetition was migration though with a heavy domestic lens. And neither candidate provided any sense of the drivers of, let alone policy responses to, the weaponization of mass migration. The passing references by both candidates regarding Iran, Ukraine and Russia were pedestrian. 

China, the ​supposed pacing challenge and threat, received little attention. Nor did we have a discussion of the Pentagon’s budget priorities, tariffs as tools of economic warfare, how to revive the US defence industrial base, let alone to US interests across the Pacific. 

On Asia-Pacific—Raji Pillai Rajagopalan, resident senior fellow 

While understandably focused on domestic issues, it was still surprisingly how little interest there was on foreign policy in the presidential debate. Considering the growing chaos the next president will have to deal with, that was unfortunate. 

America’s China and Indo-Pacific policy was not mentioned, nor were any other aspects of foreign and security policy in any detail. We heard only some broad outlines to which we were already familiar, such as a Trump Administration that will be suspicious of its partners because of the worry that America is being exploited, that will be more open to deal-making with adversaries such as Russia, China and North Korea, irrespective of the character of their behaviour and that will potentially raise tariff barriers with wide-ranging economic effects globally. 

On the Democrat side, Vice President Harris reiterated she would strengthen partnerships and stand up to authoritarian leaders, which is a more positive starting point, but all said without much detail. 

From a foreign policy perspective, it was clearly not a substantive debate. Leaving out everything from narrow issues of nuances to nuclear policy to broad issues such as relative commitment to different theatres like Europe, Middle East and Indo-Pacific. 

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“Israel has a right and obligation to defend themselves against the threat of Hamas, while abiding by international humanitarian law and protecting civilian lives, and we remain committed to support Israel in its fight against Hamas,” a spokesperson for the White House National Security Council said. “We have done so since Oct. 7, and will continue to. There has not been a change in our policy.”

NBC News reported earlier on Sunday that at the direction of the White House, the Pentagon has been reviewing what weaponry Israel has requested that could be used as leverage. The report cited sources and said no final decisions were made.

The report added that the U.S. is considering slowing or pausing the deliveries in hopes that doing so will make the Israelis take actions such as opening humanitarian corridors to provide more aid to Palestinian civilians.

“There has been no request from the White House for DoD (Department of Defense) to slow down weapons deliveries to Israel,” a White House official said when asked about the NBC News report. “And not aware of any request to review weapons to potentially slow walk deliveries either.”

Among the weaponry the U.S. discussed using as leverage, the NBC News report added, were 155 mm artillery rounds and joint direct attack munitions (JDAMs), which are guidance kits that convert dumb bombs into precision-guided munitions.

The heavy death toll from Israel’s war in Gaza has led to much international alarm. President Joe Biden has previously referred to Israeli bombing as “indiscriminate, opens new tab” but Washington has not called for a ceasefire, saying such a measure would benefit Palestinian Islamist group Hamas, which governs Gaza.

Hamas’ Oct. 7 attack on Israel killed 1,200 people, according to Israeli tallies. Israel’s subsequent assault on Gaza has killed more than 26,000 Palestinians, over 1% of the 2.3 million population there, according to Gaza’s health ministry. Many are feared buried in rubble.

Source: Reuters

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He noted that the events in Gaza revealed the ugly face of the US, suggesting that President Joe Biden can no longer think in a sound and correct manner as he is committing crimes against the people of Gaza and is doing everything in his power to continue the genocide in the enclave.

Al-Houthi stressed, “Force alone cannot achieve anything. The situation today is very different. This is the time of response,” noting that increasing American forces means increasing targets.

Earlier yesterday, the US Central Command announced that three soldiers had been killed and 25 others were injured in a drone attack targeting a base in northeastern Jordan, while the Pentagon called the attack a “dangerous escalation.”

The White House reported that Secretary of Defence Lloyd Austin, National Security Advisor Sullivan and the Deputy National Security Advisor briefed Biden on the details of the attack against US service members in northeastern Jordan near the Syrian border.

The Jordanian government denied that the attack took place in the Kingdom, confirming that the Al-Tanf base in Syria was targeted near the Jordanian-Syrian-Iraqi border.

The Islamic Resistance in Iraq claimed responsibility for the attack on the US Al-Tanf base between Syria and Jordan, resulting in the death of three American soldiers and the injury of 25 others.

Source: Middle East Monitor

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The New York-based 2nd U.S. Circuit Court of Appeals declined to issue an injunction sought by Students for Fair Admissions, the group behind a successful Supreme Court challenge to race-conscious collegiate admissions policies.

That group, founded by affirmative action opponent Edward Blum, had been seeking an injunction pending its appeal of a federal judge’s Jan. 3 ruling rejecting its bid to halt West Point from considering race as an admissions factor.

With time running out before the current application deadline of Jan. 31, Students for Fair Admissions on Friday asked the U.S. Supreme Court to likewise block West Point’s admissions policy while it pursues appeals.

It did so before the 2nd Circuit had ruled. But Blum’s group in a filing on Sunday asked the 2nd Circuit to rule, saying it would withdraw its Supreme Court appeal if the 2nd Circuit ruled in its favor.

West Point is a prestigious military service academy in New York state that educates cadets for commissioning into the U.S. Army. The U.S. Justice Department in court filings has said that West Point is a “vital pipeline to the officer corps” and that its race-conscious admissions practices help the Army achieve its “mission critical” goal of having officers as diverse as its enlisted military personnel.

Blum declined to comment on Monday, citing the pending Supreme Court appeal. President Joe Biden’s administration has until Tuesday to respond to the group’s Supreme Court appeal.

Blum’s group sued West Point in September with the goal of ending what was essentially an exemption for military academies included in the Supreme Court’s ruling on college admissions in June 2023 that allowed these institutions to continue to consider race in admissions.

In the ruling powered by its 6-3 conservative majority, the Supreme Court rejected policies long used by American colleges and universities to increase the number of Black, Hispanic and other minority students on American campuses.

In invalidating admissions policies at Harvard University and the University of North Carolina, the Supreme Court did not address race in admissions at military academies, which Chief Justice John Roberts in a footnote said had “potentially distinct interests.”

Blum’s group accused West Point of using admissions practices that discriminated against white applicants and violated the principle of equal protection in the U.S. Constitution.

The Biden administration has argued that senior military leaders long have recognized that a scarcity of minority officers can create distrust within the armed forces.

Although Black people make up 20.2% of the Army’s active duty enlisted personnel, only 11% of officers are Black, the Justice Department said. Hispanic people constitute 18% of active personnel but only 9% of officers, it added. White people constitute 51.7% of the Army active duty enlisted corps and 68% of its officers, the Justice Department said.

Source: US News

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Varga emphasized that fiscal expenditures will be restrained until the inflation rate returns to a “more moderate range.” While there is a consensus that this year’s inflation rate will be significantly lower than last year, he hailed the achievement of reducing inflation from 25.7 percent in January to 5.5 percent in December. He anticipates an even better figure for January of the current year, with monetary policy playing a pivotal role in this success.

The highest annual rate was recorded in Czechia.

Acknowledging the challenges ahead, the minister highlighted the need to reduce the public deficit from around six percent to below three percent this year. He cautioned against achieving this goal hastily, as it could result in a growth sacrifice and increased unemployment. Although there is government discussion about extending the deficit reduction timeline to two years instead of one, a final decision has not been reached.

Mr. Varga believes a deficit of 4-4.5 percent is more realistic for the current year, with market expectations aligning with this assessment.

Addressing public debt, he pointed out notable improvements since 2010. The proportion of public debt in foreign currency has decreased from 53 percent to 26 percent, the average maturity has increased to six years, and public involvement has risen significantly, with the Hungarian population now holding 21 percent of the public debt.

Despite the external pressures, the government’s primary objective for the year remains deficit reduction and lowering the public debt.Continue reading

Concerning the tax system, the minister asserted that Hungary maintains its status as the most competitive country in the region for foreign working capital investment per capita. The government aims to uphold this position while keeping the personal income tax rate in the single digits. He defended the current 15 percent rate as the third lowest tax burden in Europe, with potential reductions through family discounts.

Responding to a question, he clarified that adopting the euro is not an objective but a tool. He cited Slovakia as an example where the introduction of the euro did not necessarily lead to economic success.

The Ministry of Finance quoted Mr. Varga as announcing the arrival of HUF 520 billion (EUR 1.3B) in previously blocked EU funds in Hungary since December last year. However, he emphasized that the economy has continued to function effectively even without these funds. The budget has provided ample resources to sustain family benefits, protect public utility bills, and preserve pension values.

In 2024, the government anticipates receiving over HUF 2,500 billion (EUR 6.4B) in EU funds.

Source: Hungary Today

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Assessing tail risks to the euro area economy

In Chavleishvili, Kremer and Lund-Thomsen (2023), we develop a novel approach to gauge the potential short- to medium-term costs and benefits of alternative policy actions when monetary policy faces trade-offs between financial and macroeconomic stability. The structural quantile vector autoregressive (QVAR) model – introduced by Chavleishvili and Manganelli (2023) – provides a flexible way of estimating the dynamic interactions between our main variables of interest: real GDP growth, inflation, short-term interest rates and financial stability conditions.^[2] The “flexible” attribute refers to the fact that the estimated interactions can be weaker or stronger in the centre and in the tails of the “joint probability distributions” of the model variables. Financial stability conditions are captured by two summary indicators measuring financial imbalances and system-wide financial stress, respectively. Using quantile regression allows us to uncover non-linearities in the dynamics of the model variables like in the seminal “growth-at-risk” paper by Adrian et al. (2019), which documents a much stronger impact of financial distress on the left tail of the growth distribution. By considering the entire probability distribution of our variables of interest, we can evaluate policy options not just in terms of their most likely outcomes, but also in terms of the tail risks associated with particularly undesirable states such as systemic crises. The quantification of tail risks thus lends itself to a risk management perspective on financial stability considerations in monetary policy (see Kilian and Manganelli, 2008), a perspective that focuses on the balance of upside and downside risks to inflation and economic activity rather than on the mean forecasts of both variables.

To operationalise financial stability, our model includes two measures widely used in ECB analysis. The first one is the Systemic Risk Indicator (SRI), which measures the financial cycle and, by extension, system-wide financial imbalances (see Lang et al., 2019). The second is the Composite Indicator of Systemic Stress (CISS), which quantifies systemic stress in the financial system (see Holló et al., 2012, and Chavleishvili and Kremer, 2023). Conceptually, one may think of the former as systemic risk ex ante, i.e. the risk of a future financial crisis, and of the latter as systemic risk ex post, i.e. materialised systemic risk. A typical financial boom-bust cycle would then see an elevated level of the SRI followed by a steep rise in the CISS as the bubble bursts and the system deleverages, with the Great Financial Crisis being a prominent example. The risk of such a boom-bust pattern poses an intertemporal financial stability trade-off for monetary policy: it can try to curb the financial boom by keeping interest rates higher than they would otherwise be, at the cost of weaker economic growth over the short run and at the benefit of a financial crisis being less likely and less severe over the medium term. In this article, however, we focus on another: the intratemporal financial stability trade-off for monetary policy, in which monetary policy itself may trigger more immediate financial instability.

The intratemporal financial stability trade-off in 2022

The circumstances prevailing in 2022 in the euro area and in many other places in the world, marked a stark turning point in the monetary policy stance. At the time, surging inflation called for a sharp tightening of monetary policy, even though economic growth was slowing after the post-pandemic rebound and financial stress was increasing on the back of the Russian aggression in Ukraine. In addition, the financial system at the time was vulnerable to a policy reversal because after a decade of accommodative monetary policy, the yield curve was flat and risk premia were at historically low levels, implying elevated risks to the profitability of banks and other financial intermediaries from a sharp rise in short-term interest rates.

To quantify the intratemporal financial stability trade-off in the euro area, we forecast the full distribution of our model variables over a period of four years, starting with the fourth quarter of 2022 (Q4 2022). In the baseline scenario, we fix the path of interest rates to the expected short-term market rates from the September 2022 Survey of Monetary Analysts (SMA) conducted by the ECB. In the baseline, we also require the mean forecast of real GDP growth, HICP inflation and commodity prices between Q4 2022 and Q4 2024 to reflect the ECB’s publicly available macroeconomic projections. This approach allows us to replicate the context in which policymakers were deciding on the path forward at the time while still considering macro-financial tail risks.

In addition to the baseline scenario, we also consider two alternative policy scenarios with different paths of short-term interest rates. The first one is “front-loading”, whereby policy rates are hiked more quickly. This helps prevent inflation from becoming entrenched, but it can also hurt systemically relevant banks and other financial intermediaries that have become particularly vulnerable to interest rate risk. The March 2023 banking turmoil in the United States and elsewhere provides a clear example of how monetary tightening may induce, or expose, financial fragility (see, e.g., Jiang et al., 2023, and Acharya et al., 2023). The second scenario considers a gradual monetary tightening. This may alleviate strains on financial stability, but at the cost of making high inflation more persistent, thereby creating the risk of long-term inflation expectations becoming de-anchored from the ECB’s 2% target. All three interest rate paths are illustrated in Chart 1.

Chart 1

Counterfactual paths for short-term interest rates in the euro area

Chart 2 plots the projected paths of the mean as well as the 10^th and 90^th percentiles of the forecast density of real GDP growth and the CISS using the three interest rate paths above. As previously noted, in the case of real GDP growth, the dotted line is restricted to meet the ECB’s growth projections at the time. The 10^th and the 90^th conditional percentiles represent the downside and the upside tail risks around these mean projections, respectively.^[3] Looking at the chart, we see that downside risks to real GDP growth (blue lines, left chart), as well as upside risks to systemic stress (red lines, right chart) are amplified by the interest rate front-loading in the short term compared to the baseline, and that the effects are larger compared to the respective opposite tails. Tightening monetary policy above market expectations increases the probability of realising a high level of systemic stress, in turn feeding into downside risks to growth. In contrast, a more gradual tightening has the opposite effects.

Chart 2

Forecast distributions of euro area real GDP (left) growth and the CISS (right) in the three policy scenarios

Overall, when comparing the short- to medium-term costs and benefits of the scenarios vis-à-vis the baseline forecast, the results generally do not support a more aggressive tightening path than what was expected by market participants in the autumn of 2022. The elevated downside risks to growth may outweigh the only modest gains in lower predicted inflation. That said, a policymaker who is particularly concerned about inflation expectations becoming de-anchored from target inflation may still be inclined to favour tighter policy. On the other hand, if policymakers were more concerned about the risk of causing severe financial distress by front-loading policy, the scenario could be modified to resemble, for example, the so-called “taper tantrum”, an episode of severe financial stress that occurred in 2013 when the Federal Reserve hinted at tapering its bond-buying programme.

Another consideration is that we have modelled monetary policy rather simplistically, with short-term rates being the only instrument. Today, monetary policymakers have several tools available, some of which can be used to separately target price and financial stability concerns, potentially mitigating the intratemporal financial stability trade-off. Still, a policymaker may prefer to avoid sparking financial stress to begin with, even if it can be contained with the right combination of tools.

Monetary policy from a risk manager’s perspective

In this article, we sketched a novel empirical approach to quantify the macroeconomic costs and benefits of monetary policies which take financial stability considerations explicitly into account. The approach has the distinct advantage that financial stability considerations are not introduced ad hoc or as pure “side effects” of monetary policy. In contrast, financial stability trade-offs enter the policy calculus through their direct effects on future inflation and economic activity. Our approach allows monetary policymakers to adopt a risk management perspective when confronted with elevated macroeconomic tails risks associated with certain risks to financial stability.

Source: ECB Europa

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