The World Of Austerity: As Debt Costs Fall, The Temptation To Spend Returns

The cost for the UK to borrow money fell to its  lowest level in decades. It is now below Germany, which is close to a miracle based on how the capital markets viewed the two nations until recently. Germany is still believed to be the sole engine of European growth. The UK economy is supposed to be a wreck.

But the temptation among global investors to buy debt in sovereign nations which have embraced austerity must be overwhelming. That means the interest rates paid by countries from Italy to Spain are likely to fall. The lower price of debt could have a perverse by-product. Nations which are in the midst of austerity drives may think it is safe to begin to increase spending again, if only modestly.

Nations in Europe almost certainly look at the US now for debt service guidance. America can raise hundreds of billions of dollars a year, despite signs that the effects of the recession could last for years here. US debt is still attractive because it is viewed as safe. Legions of investors believe the current economic situation will improve.

The UK says that it will fire 490,000 government workers. Other nations in bad financial straits like Spain have planned similar spending cuts. Greece is so desperate to find more way to close its budget gap that it has turned to local expenditures in cities and towns to squeeze another $2 billion in costs.

But, a close relative of low borrowing costs is often optimism about finances. The riots in France and labor strikes across Europe will tempt governments to give in to the labor movements to buy peace and uninterrupted improvements in GDP. Labor issues could become severe enough to damage any potential growth that the worldwide recovery might bring. The ability to increase debt at reasonable prices could feed the attractiveness of those compromises, which may work until government costs and deficits balloon again. It is a cycle which is probably as old as organized government.

Douglas A. McIntyre