Commentary: Hungary Saved from Itself

Central and Eastern Europeans are the new bankers of the credit crisis.

They are the new Northern Rock. In fact, call them Eastern Rock.

Incompetent and greedy, having spent (or lent) themselves into near-bankruptcy, some are now asking for a bailout from those who were cautious enough to hold on to the purse strings.

They are getting it.

Don't pay any attention to the rejection of Hungarian Prime Minister Ferenc Gyurcsany's 190 billion euro rescue package at the 1 March European Union summit. Nobody, including him, had expected that the plan, announced without preparation or groundwork, would be taken seriously.

What the Hungarians really wanted, and got, was a promise that the EU would help out those who are in trouble, whether through a coordinated Eastern European bailout or on a case-by-case basis, as the summit participants eventually decided.

What no one could get the German chancellor to admit as recently as a month ago is now a fairly widely held assumption: EU states that face bankruptcy will be bailed out, whether they are in the eurozone (Ireland) or not (Hungary).

In fact, the Hungarians and the Latvians have already gotten nearly 10 billion euros of EU money between them. Another 24.5 billion euros of international loan money was scraped together on 27 February to prop up the region's tottering banks and credit-crunched companies.

But in fact as early as 2003, when EU members' fiscal irresponsibility and the union's response to it was first a serious issue (remember Germany under big spender Gerhard Schroeder?), it was already widely assumed, at least by Brussels types, that the no-bailout rule of the eurozone was bendable. Given how intertwined our economies are, it was impossible to assume that a state like Italy would be allowed to default. Because whatever the moral hazard and whatever the rulebook, the consequences would be catastrophic.

Hungary and Latvia may not seem like "systemically important" states. But given how major Western European banking houses are exposed to Eastern Europe (they own 1.25 trillion euros in debt), countries like Austria, Belgium, or Sweden are looking at a bloodbath if people in the East start to default on their mortgages.

Helping us has nothing to do with European solidarity. We might be in trouble if we had to rely on that. It is about survival.


Still, it is no wonder that a bad taste is left in the mouths of those who resisted the lure of gold and tightened their belts throughout the boom years. It is also no wonder that leaders of those countries where taxing and spending policies have been more rational and lending has been more measured—the Czech Republic, Slovakia, Poland, and Slovenia—tried to distance themselves from the blanket bailout proposal.

At the 1 March EU summit, the Danes and the Germans particularly grumbled that it was an outrage to ask them to pay for countries like Hungary that got where they are through their own fault. In fact, the bastards probably deserve a debt default just to learn some basic economics, you could almost hear them mutter.

But complain and grumble as they do, pay they almost certainly will, just as treasuries the world over are cleaning up the mess made by the Northern Rocks and Citigroups and UBSs.

Forget about moral hazard. The end of the world is nigh.

And so it was equally unsurprising, although much less noticed after the summit, that Germany and France cautiously supported (or at least didn't reject) a Hungarian proposal that countries that fulfill the requirements of entry into the eurozone should not have to spend two years waiting in the ERM-II exchange-rate mechanism, the antechamber of the eurozone. They should be allowed to join immediately. Talk about a mad dash to safety.

But if the storm is pulling people together on some matters, it is less evident that European countries will be able to resist protectionism. Unlike a default by a neighbor, the eventual effects of pushing home-market preferences, like a drop in trade, take a while to bite. In fact, such policies can seem like a good idea at first. And though the European Commission last Friday declared itself satisfied that the French car-industry bailout plan was not protectionist after all, there might be new attempts to save somebody's own skin at the expense of everybody else.

The Western bank bailouts of the last few months, too, had protectionist elements insofar as they directed new lending to the home market (nearly pushing Eastern European banks over the cliff as a result). EU leaders promised to stop doing that, too. But it is anybody's guess how long they can resist if things turn nasty. The uncomfortable truth is that prime ministers are responsible to their own countries' electorates, not to Europe's. In Europe, too, all politics is local.

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