Debt and Democracy

PRINCETON – The European Union’s sovereign-debt crisis constitutes a fundamental threat not only to the euro, but also to democracy and public accountability. At the moment, Europe’s woes and dilemmas are confined to relatively small countries like Greece, Ireland, and Hungary. But all of them look as if their governments have cheated on fundamental articles of the democratic contract.

The rotating presidency of the EU is about to shed a spotlight on one of these countries. Hungary’s turn at the EU helm comes at a time of fierce debate over Prime Minister Victor Orbán’s alteration of constitutional law and suppression of press freedom, as well as a new round of worries about the country’s financial sustainability.

Hungary has many reasons to be sensitive to the issue of the political consequences of debt. After all, Hungary still holds the world record for hyperinflation, with the currency debased by 1027 in the 1940’s, paving the way for the imposition of Communist dictatorship.

The EU’s debt arithmetic is uncertain and precarious. Fiscal consolidation in the Mediterranean countries might just do the trick, and allow – at great cost – a return to normal financing arrangements. But if market nervousness persists and interest rates remain high relative to rates for secure German debt, the debt burden will rapidly become unsustainable. So it might be a good idea for the EU to prepare a mechanism that spells out how debt can be trimmed.