The international financial whirlpool has sucked in its first member of the European family. Earlier this month, foreign investors began to dump Hungarian assets on a huge scale. This sudden withdrawal of capital had a disastrous effect. The value of the Hungarian forint plunged on international exchanges and the market for government bonds dried up.
Now the International Monetary Fund has stepped in. The rescue package will formally come from the IMF, but a big contribution will be paid for by the European Union. This is as it should be. If the EU is not at the forefront of bailing out its members when financial calamity strikes, it is difficult to see the point of the union.
In fact, this rescue is part of a broader test for the EU. After a hesitant start, its leaders responded to the near breakdown of the international payments system this month with reasonable competence. Recapitalising the private banks and guaranteeing lending between them was the right thing to do. But now the EU must deal with a crisis in confidence in the economies of some of its smaller member states. Hungary could be the first of several nations to face such a crisis. Romanian bonds have been downgraded and the Baltic nations are looking vulnerable.
The IMF will take the lead in devising the terms of any rescue packages, but the EU will have a big role to play too. A boost in fiscal transfers through development budgets and an easing of its budget deficit rules are likely to be necessary. An interest rate cut by the European Central Bank should obviously be considered as well. The central challenge, in the immediate term, is to stop member states going to the wall. But in the longer term, the EU needs to demand that members rebalance their economies and become less reliant on debt to finance growth.
It is encouraging that Europe's leaders are in close contact. Gordon Brown met the French President, Nicolas Sarkozy, yesterday. And Mr Brown will meet Germany's Chancellor, Angela Merkel, tomorrow. EU leaders are also due to meet next Friday at a special summit. But talking is one thing. The real test will be whether they can provide decisive leadership and steer the EU safely through these turbulent waters.