For those pushing for austerity in the U.S., lets take a look at one real-life (perhaps more extreme) example of austerity in action... Ireland.
"Ireland is seen as having done better than most others in restoring market credibility," said Eurasia Group analyst Jon Levy. "There are still some worries but the feeling is they have done better than most and with a reasonable degree of internal consensus.
"Ultimately, Ireland's trade unions say they know deficit reduction is vital if Ireland is not to be priced out of international bond markets like Greece, but they want a greater burden to be paid by the rich through higher taxes.
Let me also say that Ireland’s recent policy moves — raising taxes and cutting spending in the face of a severe recession, so as to reassure nervous lenders — are an extremely disturbing omen. Iceland was one thing; but now another advanced economy, with a 7-digit population, has hit the limits of anti-recession policy.
Ireland proved unable to shake off rising sovereign-debt fears Thursday, with bond yields jumping as investors reacted to indications some Anglo Irish Bank bondholders may not get all their money back and official data showed the economy contracted unexpectedly in the second quarter.
The yield premium demanded by investors to hold 10-year Irish government bonds over German bunds topped 4.3 percentage points Thursday, the highest on record and up from around 4.1 percentage points on Wednesday. The cost of insuring Irish government debt against default hit a new record Thursday.
The spread on five-year Irish credit-default swaps was seen at 490 basis points in late morning action, up from around 460 on Wednesday, according to data provider Markit. That means it would cost around $490,000 a year to insure $10 million of Irish debt against default for five years, up from $460,000 Wednesday. The spread hit 500 basis points for the first time earlier in the day, Markit said.