Rewards of Austerity

Fiscal austerity is the big focus now. The basic idea is that the cost of rising national debts are too much and that nations, in the heart of a global recession, need to cut government spending. The big examples of this have been in Europe - namely the PIIGS (Portugal, Italy, Ireland, Greece and Spain). Last spring, when the focus was Greece, Ireland was held up as a model of fiscal austerity and prudence since it had cut its government spending in the face of recession. Of course the result of such a choice is to further weaken the economy - which is the case with Ireland. However, the reward for such behavior has been higher (not lower) interest rates. Check out the chart below from the German magazine Spiegel. Clearly, the bond markets don't care about austerity. They care about the ability to repay debt - which increases as an economy gets stronger.