DAVID FOLKENFLIK, HOST:
World leaders are gathering in Evian, France, for the G7 summit starting tomorrow. President Trump will be traveling to the summit after today's UFC match on the White House lawn. We'll have more on that event shortly. But the G7 summit is happening against the backdrop of the Iran war and tensions between the U.S. and many of its allies. Joining us to discuss this is Josh Lipsky. He served in the Obama administration and is now chair of international economics at the Atlantic Council. Josh, thanks for being with us.
JOSH LIPSKY: Thanks for having me.
FOLKENFLIK: So let's start with the state of the global economy. In your view, where do things stand?
LIPSKY: Well, the most important thing for all the leaders gathering in France is that inflation is much higher than they expected and much higher than they looked at it a few months ago when they planned this summit. And you just saw the European Central Bank have to raise interest rates. We have the Federal Reserve under its new chair, Kevin Warsh, with their meeting this week. And this is what is facing most of these leaders - price pressures, gas, energy - and this then drives growth down. And so this is the No. 1 thing they want to try to resolve at this meeting going forward. It's a less optimistic global economy than they expected, although still resilient thanks to AI and some other drivers. So it's a mixed picture.
FOLKENFLIK: So there have been frustrations behind the scenes - some of them have boiled into public view - over the war in Iran. What kind of a reaction do you expect President Trump to receive in France?
LIPSKY: I think the best word to describe it is probably frosty. If you think of the G7 summit a year ago in Canada, we were just six, seven weeks after Liberation Day, and we were in the midst of trade wars. Now we're in the midst of a real war, a war in the Middle East in Iran. And of course, there the trade wars were against European allies, along with a range of other countries.
And so things are not as tense as they were a year ago, but they're also not where they were in the G7 historically in terms of unanimity, cohesion amongst the group. There are real tensions in this group right now, and they will play out, especially the past six months. After Greenland and the president's comments about the U.S. desire to take Greenland, you saw a shift across the G7, and especially in the European allies, of how they approach the US. So don't expect this to just be a warm embrace when President Trump shows up in France tomorrow.
FOLKENFLIK: Sometimes the tone that Trump administration officials adopt towards their allies and partners at the - these major events seems, to me, notable. Here's a clip of Defense Secretary Pete Hegseth speaking in France last week on the anniversary of D-Day.
(SOUNDBITE OF ARCHIVED RECORDING)
PETE HEGSETH: Sadly, today different European beaches are stormed by different dangerous ideologies - beaches in Spain and Italy and Greece and Bulgaria. Boats and men arrive. When will European capitals do something about that invasion?
FOLKENFLIK: Josh, what are the consequences of this kind of rhetoric?
LIPSKY: The consequences are that you see factions building across the G7, and when the G7 can't act together, the world is weaker for that. And just to give you an example, if you think about what happened four years ago when Russia invaded Ukraine, the G7 spoke with one voice. So you had the largest advanced-economy democracy saying, this cannot be tolerated. We are sanctioning Russia in a way we have never done before. And that shocked Vladimir Putin.
Now you have factions within the G7 that make it much harder to pursue that kind of cohesion against any kind of adversary, and this has real cost. And I think it's interesting thinking about Secretary Hegseth's comments because what was the first land war in Europe since World War II? It was Russia's invasion of Ukraine, and that's when you need something like the G7 to act together. So there will be work they can do together, but the divisions also have scars that last beyond just this meeting.
FOLKENFLIK: So what's the best-case scenario for the summit, and what's most likely to be derived from it?
LIPSKY: Well, one of the more interesting things about this summit is that the French presidency have prioritized the issue of macroeconomic imbalances, not to get too technical. But here we're talking about...
FOLKENFLIK: Little wonky.
LIPSKY: Dude (ph), a little wonky. But really what we mean is China's excess industrial overcapacity, manufacturing overcapacity, China exporting to the world. This is not something the Europeans had focused on before. The Americans had talked about this for years. And it's so interesting that China participated in a call last week preparing for the summit. I'd never seen a situation where China engaged in a G7 summit preparations, and I think it goes to the idea that if, you know, you're not at the table, you're on the menu. And China realizes there's G7 cohesion around this issue, around China's excess capacity, and they want to have their voice represented.
So if you see anything done over the coming days, I think it'll be something about China's exports and what the G7 can do to have their own resiliency, and also AI. This is really the AI G7. You're going to see Sam Altman and a range of other AI leaders represented in France. We've never seen something like that before. They don't all agree - the U.S. and Europe - about what to do. But I think you're actually going to see some activity, saying we have to address this issue.
FOLKENFLIK: Really briefly, thinking about inflation, we saw the European Central Bank raise interest rates last week. This week, the new Fed chair, Kevin Warsh, will hold his first policy meeting on it, with inflation a three-year high. And quick 10 seconds here - President Trump demands a rate cut. How likely is he to be satisfied?
LIPSKY: Well, tough question in 10 seconds, but I think the answer will be disappointed. The picture has changed since he nominated Kevin Warsh. And I think Kevin Warsh and the rest of the Fed are going to have to address the economy as it is, not as they wish it to be.
FOLKENFLIK: That's Josh Lipsky of the Atlantic Council. Thanks for joining us.
LIPSKY: Thanks so much. Transcript provided by NPR, Copyright NPR.
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