Austerity is an expensive form of insurance against a true fiscal crisis. And though it doesn’t necessarily seem like it when you’re not having one, fiscal crises are much, much worse than austerity budgets. Fiscal crisis means that rather than unpleasant cuts, you have sudden, unmanageable collapses in things like public pension plans. The resulting suffering is not unpleasant; it is disastrous.
She’s answering the point that other countries ought to avoid doing what the Irish government did by embracing harsh austerity, as opposed to borrowing more money for stimulus. Some countries, she argues, are in such a deep hole that continuing to borrow would only hasten a complete collapse in the fisc. For these countries, as bad as austerity is, it’s not the worst thing.
UPDATE: Here’s a good piece from David Leonhardt of the NYT explaining the argument between the pro-stimulus side and the pro-austerity side. I had not realized that the Germans are hardcore on austerity because of the role rampant inflation played in the rise of Nazism. That is, they’re terrified of turning on the printing press to inflate a nation’s way out of indebtedness.