France’s central bank governor identified U.S. policies as one of the key challenges facing the global economy, citing the possibility that the incoming Trump administration will adopt protectionist measures.

“It could increase risks if we have stronger protectionism,” Francois Villeroy de Galhau, governor of the Bank of France, said in an exclusive interview with The Asahi Shimbun during a recent visit to Tokyo.

“If you look at economic history, almost everybody agrees that, at least in the long term, protectionism is a bad thing,” he said.

Russia’s invasion of Ukraine in February 2022 drove up commodity prices, including energy and grain.

Speaking about the world economy, Villeroy de Galhau said, “Two years ago, everybody feared a recession and prolonged inflation, and we escaped both.”

Still, he said uncertainties remain.

He listed U.S. policies as one of the three challenges along with conflicts in Ukraine and the Middle East and “long-term transformation,” such as climate change and demographics.

U.S. President-elect Donald Trump, who will return to the White House in January, has advocated protectionist measures, such as imposing high tariffs on all imports.

Villeroy de Galhau warned against protectionism, which he said dampens consumption by sparking inflation and diminishes the power of innovation.

He emphasized the importance of close coordination among the Group of Seven countries, which include the United States, Japan and European nations.

“We should pursue an economic dialogue because there are many issues of common interest,” he said. “It’s preferable to have common solutions.”

In the eurozone economy, inflation temporarily topped 10 percent partly due to the energy crisis triggered by Russia’s invasion of Ukraine.

But the inflation rate has recently dropped to 2 percent following interest rate hikes by the European Central Bank, among other factors.

Villeroy de Galhau, who sits on the ECB’s Governing Council, said the monetary policy “played a significant role in the victory against inflation.”

Now, there is “probably room to cut interest rates further” to stimulate the economy, he said.

Concerns have been growing over the European economy.

The German economy is sputtering, with its automotive industry in a slump, while France’s fiscal condition is worsening.

Villeroy de Galhau, who formerly worked at France’s finance ministry and the BNP Paribas financial group, said potential growth rates are weakening across Europe.

He said it is necessary to strengthen market functions and reform bureaucracy to raise productivity and spur technological innovations.

The governor said declining potential growth rates are a common challenge for advanced economies and that “maybe some of these remedies are common with Japan.”

Excerpts from the interview with Villeroy de Galhau on Nov. 21 follow:

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Question: Has the world won its fight against inflation over the past two years?

Villeroy de Galhau: We faced an inflation surge that was unprecedented in the last 40 years. At one point, the eurozone’s inflation rate exceeded 10 percent.

Main reasons were steep rises in commodity prices, such as energy and grain, following Russia’s invasion of Ukraine. Now that they stabilized, inflation has fallen back to about 2 percent.

The ECB’s monetary policy also played a significant role in the victory against inflation by holding down underlying inflation on services and manufactured goods.

Q: Will you pick three challenges that the global economy faces?

A: The keyword is “uncertainty.” First, there are geopolitical uncertainties, such as the unfortunate Russian war in Ukraine and conflicts in the Middle East.

Another question is U.S. policies under the new administration. A third category of risk is long-term transformation, such as climate change and demographics.

Q: Will you elaborate on the uncertainty of the second Trump administration?

A: We don’t know yet exactly what kind of policies it will take, but it could increase risks if we have stronger protectionism.

A deeper U.S. fiscal deficit could mean higher long-term interest rates.

If you look at economic history, almost everybody agrees that, at least in the long term, protectionism is a bad thing.

It diminishes consumption because people have to pay higher prices. It also diminishes the power of innovation because you have less competition and less circulation of ideas or new products.

Q: What do you think about the recent trend of taking protectionist policies, such as encouraging domestic production, in the name of economic security.

A: A delicate balance must be found between open economy and economic security.

One keyword is diversification. It is important to have a diversified range of suppliers in energy, chips and critical raw materials, for instance.

Another keyword is competition.

As a single market, the European Union is as large as the United States, but it is too fragmented and has many obstacles.

We could avoid protectionism by striking a balance between competition and diversification.

Q: France’s fiscal condition is worsening. Doesn’t it risk triggering a regional or global crisis?

A: I don’t think the French fiscal deficit will provoke a crisis in Europe or the world.

But that said, we have to reduce deficits and public debt in our own interest. Otherwise, we will pay more for the interests and reduce the fiscal margin for the future.

Q: Why are the economies of Germany and France struggling?

A: I think they are facing challenges common with many other advanced economies. Rates of potential growth have diminished significantly.

A report recently compiled by former ECB President Mario Draghi pointed out that productivity and innovation have remained too low compared with the United States over the past 30 years.

The problem cannot be solved by monetary or fiscal policies, and structural reform is required.

Q: Specifically, what is required?

A: We need to multiply the size by “financial muscle” (funding) and by speed.

The EU may be able to expand the size by deepening the integration of the single market.

The financial muscle means intermediary functions that connect savings to investment. We must further develop equity markets and venture capital, among others.

To achieve speed, it is necessary to cut bureaucracy and promote innovation. Maybe some of these remedies are common with Japan.

Q: In his report, Draghi said the EU’s ambitious decarbonization targets are imposing a cost burden on industry. Is this one of the causes of low growth?

A: I think there is no contradiction between decarbonization and competitiveness.

Climate-related disasters are becoming a cost to growth. Climate change is not a question of political belief, but an economic reality that can no longer be ignored.

As Europe has little fossil energy, renewables and nuclear are its best choices for the future.

(This article is based on an interview by Ayumi Sugiyama and Shinya Wake.)