Illustration by Bloomberg View
Illustration by Bloomberg View

Even as the sovereign-debt crisis has bared drastic flaws in the euro area’s economic institutions, a standoff between Hungary and the European Union has exposed weaknesses in the continent’s political integration.

In recent months, the nationalist government of Prime Minister Viktor Orban has steadily chipped away at the democratic gains that Hungary has achieved since it broke away from Soviet domination after the fall of the Berlin Wall.

This drift toward autocratic rule accelerated sharply on Jan. 1, when a new Constitution and laws took effect that give Orban’s Fidesz party unprecedented control over the news media, courts, central bank and even the practice of religion. U.S. Secretary of State Hillary Clinton warned that the power grab raised “significant and well-founded concerns” about the government’s commitment to individual liberties and democratic checks and balances.

The EU and the International Monetary Fund, meanwhile, have withdrawn from talks on a line of credit that Hungary’s flailing economy desperately needs. The main bone of contention is new regulations that undermine the Hungarian central bank’s independence, a potential violation of EU treaty obligations.

Downgraded to Junk

Orban and his government have suggested that they may be willing to bend on this point and have dispatched an envoy to Washington to negotiate with the IMF. They may have no choice but to give in: The government’s policies -- including the nationalization of pension funds -- have led three credit rating companies to downgrade Hungary’s debt to junk in the last two months. Yesterday, the government sold 45 billion forint ($183 million) at average yields of 7.98 percent, the highest cost in 2 1/2 years. The credit line may be Hungary’s last defense against default.

Yet it would be a mistake for the EU to limit its conditions for aid to the restoration of the central bank’s independence. That would leave on the books equally alarming recent measures, including the curbs on press freedom and the independence of the judicial system, and a so-called law on the status of churches that establishes 14 state-recognized religions and decertifies many other observances, including Islam, Buddhism, Hinduism as well as those of Episcopalians, Mormons and Methodists.

Hungary claims these measures are all sovereign issues, and that’s technically true. But as we have seen in Greece, sometimes a bailout means giving up autonomy. The EU (and the markets) would be justified in looking for political changes that would make the country more economically viable. This set-to with Hungary should also give the EU some impetus to devise stronger sanctioning mechanisms within its treaty system to ensure that all member states live up to the union’s ideals.

More than a mere market for goods and capital, the EU was devised as a way to spread democracy, particularly to countries such as Hungary that emerged from decades of totalitarian rule. It should be made clear to Orban that being part of Europe means adopting not just its best economic practices but also its values of liberty and human rights.

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