Flags of the European Union countries are hoisted in front of the European Parliament in the French eastern city of Strasbourg.
Flags of the European Union countries are hoisted in front of the European Parliament in the French eastern city of Strasbourg. - 
Listen To The Story


JEREMY HOBSON: Now to the global race for recovery. Simon Johnson is the former Chief Economist at the IMF and author of the new book "13 Bankers." He joins us live. Welcome to Marketplace.

SIMON JOHNSON: Nice to be with you.

HOBSON: We see a lot of different countries doing different things right now. Some are cutting their budgets, some are cutting interest rates, some are cutting taxes. Is there any sense so far of what's working and what's not?

JOHNSON: Yes. If you could manage to somewhat quietly depreciate you exchange rate -- make it worth less, help your exporters and help those firms that compete against imports -- you definitely have an edge. The UK has had about a 20 percent depreciation in the pound from its peak, and that's really helping their economy rebound. The euro zone and the U.S. dollar of course has been much more mixed.

HOBSON: Everybody wants the cheapest currency so they can get the most exports and export their way out of the crisis. Let me ask you about the thing that a lot of countries -- especially in Europe are doing -- which is shlashing their budgets to get their deficits under control. Just today the Brits are voting on raising university tuition -- are they making the right move by cutting budgets right now in the middle of this downturn?

JOHNSON: It's a tough call, and they're under a lot of market pressure. All of these European countries are being stress tested by the markets. The markets want to know how tight a fiscal policy they can run when bond markets move against them. I think some of the European countries will pass that test. And some of them will probably fail. Out of that will come a stronger more resilient core to the current euro zone, which a different composition, perhad indefinitately a different structure, but that'll take a while.

HOBSON: And while we've got you Simon Johnson, let me just get your take on what the U.S. is doing They're about to extend the Bush tax cuts, and add in even more tax cuts. Do you think that that is the right move for us?

JOHNSON: No I think it's a very bad idea. You don't have a lot of fiscal space. You should ve using it to stimulate the economy in a more effective way. The structure of these tax cuts is just lining us up for exactly the same kind of stress test from financial markets. When they're done with Europe and some European countries have passed and can be regarded as an alternative safe-haven, those financial markets will turn again the United States. And in fact we've thrown caution to the wind in terms of our deficit and the increase in debt you get from these tax cuts. That will be held against us by those very same markets.

HOBSON: Simon Johnson, former chief economist at the IMF, thanks so much for your time this morning.

JOHNSON: Thank you.