Despite Hungary not sharing the euro, what the EU does about Hungary should have very relevant implications for the euro and the credibility of the reforms Merkel and Sarkozy are trying to implement. Hungary is not only in the middle of mini fiscal and political crises, but is potentially the most recent and clear-cut test of EU politicians’ renewed love for institutions and rules, and as such it should mean a lot for the credibility of the euro in the medium-term.

Hungary’s new constitution appears to reduce the independence of the central bank, which as a member of the EU means it could amount to a violation of EU treaties. The case should be brought in front of the European Court of Justice, which is supposed to decide on such matters, and if it is found to be a violation of EU rules, sanctions should be imposed and enforced. According to some, if Hungary were to ignore such judgment, the EU could invoke provisions in its treaties to suspend its voting rights at the EU Parliament.

EU leaders are in the middle of re-designing fiscal rules for the EU and its members, what ECB President Draghi has coined a new Fiscal Compact. These new rules and potentially treaty changes are needed because previous EU rules were not respected (France and Germany were among the first countries to violate the Maastricht Agreement’s fiscal rules). It could be argued that those original sins by Germany and France were the foundation of the current crisis.

The credibility of the new fiscal rules or Compact being drafted these days is essential for the future of the euro. The new fiscal compact is bound to include fiscal and debt limits, with enforcement mechanisms in case of violations. The EU has in the past been a very poor enforcer of rules across borders, especially in the fiscal area. The sustainability of the euro depends on the future being different than the past. What happens with Hungary’s apparent violation of EU rules with respect of Central Bank independence should amount to a very important signal on whether EU politicians are willing and capable of enforcing EU rules across borders. Thus, the sustainability of the euro, in a logical but indirect sense, depends on what happens with Hungary.

The interesting aspect of this event is that it has the potential to be a very clear-cut test. There is significant international attention on Hungary these days, and the issue of Central Bank independence is a crucial institutional issue. EU rules are clear about it, and EU politicians should be willing to prove their renewed respect for institutions and rules by sending the issue to the European Court of Justice. If such court determines that Hungary is violating EU rules, then markets would see a clear and important test for the EU, which would say a lot about the credibility of new euro fiscal rules and institutions. True that the new Fiscal Compact amounts to a new founding event for the Eurozone, while the independence of a central bank is a broader EU issue. But the original flaws of the euro were institutional design flaws, and its future depends on the credibility of economic institutions and how they are enforced. The EU should see Hungary as an inexpensive opportunity to recover credibility.