Just ask Ireland, which is on the verge of signing up for a big bailout from Europe – despite the fact that by belt-tightening standards Ireland has been one of Europe’s rare success stories.

“Ireland has been doing ‘all the right things’ policy-wise,” says Jan Randolph of IHS Global Insight.

The country has stopped spending beyond its means, recently bringing its trade account into balance. A double-digit contraction since the 2008 financial meltdown has boosted business competitiveness. The government has slashed spending and socked away enough that it won’t need to borrow in the markets till the spring of 2011.

And yet, what does Ireland have to show for it? Even after two years’ worth of sacrifices to the financial markets, the long-feared confrontation with bond investors is at hand. The yield on Irish bonds recently jumped 13 consecutive trading days, bringing them near a back-breaking 8%. 

Meanwhile, wages have been falling and unemployment has tripled to 13%. So while there is obviously much to be said for putting your national finances in order, in no sense is austerity the silver bullet it has often been sold as.

The scope of the missteps taken during a decadelong credit bubble, both by governments and private actors, are so large that just a few years of austerity aren’t going to be enough.

“The tale of Ireland is the banks getting too big and taking on risks and leaving the taxpayers with the bill,” Randolph said. “It’s a huge moral hazard, and it’s no way to run a financial system.”

In response to that scandal, which played out all over Europe as well as in the United States in recent years, Germany has been pushing for a program that would force bondholders to share the pain.

But as is the case with other financial reforms, the question is not whether this is a good idea but whether now is the time to start. It was in response to this development that Irish and Portuguese debt spreads blew out.  

With bond investors weighing the odds that they will be forced to shoulder some of the burden of European debt restructuring in coming years, Randolph says the high rates for the likes of Greece, Ireland and Portugal are “likely to become entrenched, part of the ‘new norm,’ rather than the exception.”

That won’t help struggling economies recover, though it’s equally obvious that the can cannot be kicked down the road forever.

That reality is sinking in. In Portugal, a government official warned Monday that the government could soon have to tap the European Union for rescue money even as the country’s budget deficit projections decline.

“The risk is high because we are not facing only a national or country problem,” finance minister Fernando Teixeira dos Santos said, the Financial Times reported. “It is the problems of Greece, Portugal and Ireland.”