THE fiscal hawks should be pleased. For all the hand-wringing about public profligacy, budget deficits across the rich world fell by about 1% of GDP last year. Moreover, that was almost all the result of policy actions (spending cuts and tax rises) rather than cyclical effects.Germany, France, Spain and Italy all managed to reduce their structural budget deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year, the International Monetary Fund said on January 24th. But this may not be good news. Austerity can unnerve markets, not calm them.The IMF studied the correlation between credit-default-swap spreads and a variety of economic indicators last year. Long-run indicators—for deficits, economic growth and spending on pensions and health care—had little impact on spreads. But larger near-term primary deficits (which exclude interest) were associated with notably wider spreads. So, too, was weaker current-year growth.This is surprising. In theory solvency should be a function of longer-term growth and fiscal trends, but markets instead seem to care more about the short term. Carlo Cottarelli and Laura Jaramillo of the IMF say tighter fiscal policy, by hurting the near-term growth outlook, could actually lead to wider, rather than narrower, spreads. Cut the deficit too aggressively, in other words, and the negative impact on…

Original post by The Economist: Business