BRUSSELS — The European Union stepped up the pressure Wednesday against Hungary, saying its fiscal policies were unsustainable and threatening legal action over a new constitution that some fear could push the country back into authoritarianism.
The warnings escalated the standoff between Hungary's government and the EU and underlined the difficulty Budapest will face in negotiating a desperately needed international rescue package from the EU and the International Monetary Fund.
Hungary, which is in the 27-nation EU but uses its own currency, the forint, has been sharply criticized for a new constitution that the EU fears hurts the independence of judges, the central bank and Hungary's data protection agency. Some civil rights organizations and the European Parliament have warned that the former Soviet-bloc nation of 10 million, which led the fight against communism with the 1956 revolution, risks losing its democratic footing.
EU Economic Affairs Commissioner Olli Rehn on Wednesday blasted Hungary's fiscal policies — which rely on unorthodox one-time measures instead of fiscal austerity — warning that the EU could withhold valuable development funds if the Hungarian government continues to resist taking new cost-cutting measures.
European Commission spokeswoman Pia Ahrenkilde Hansen said, meanwhile, said the Commission, which is analyzing whether Hungary's new laws violate the EU treaty, remained concerned and would not shy away from using all its powers to fight any violations.
"A legally stable environment, based on the rule of law, including respect for media freedom, democratic principles and fundamental rights, is also the best guarantee for citizens' trust and confidence of partners and investors," Ahrenkilde Hansen told journalists. "This is particularly vital in times of economic crisis."
Hungary insisted its government was committed to financial reform and keeping its budget deficits within EU rules of no more than 3 percent of GDP.
"The government is ready to discuss every observation and proposal with the European Commission" about the excessive budget deficits, Hungary's Economy Ministry said in a statement Wednesday.
The new constitution came into force just weeks after Hungarian Prime Minister Viktor Orban's government requested financial aid from the EU and the IMF. The two institutions broke off preliminary talks on the rescue package in December, after voicing fears that the new laws compromised the independence of Hungary's central bank. EU treaties demand that central banks are independent.
Hungary's deficit has been criticized by the EU since the Central European nation joined the EU in 2004. But its economy has been staggering since 2008, when the global credit crunch forced it to accept an IMF bailout of €20 billion ($26 billion).
Over the past months, the country's credit rating has been cut to junk by all three major rating agencies. Unemployment is 10.8 percent and Hungary could be heading toward a recession.
The Commission said Hungary has taken "no effective action" to limit its deficit, making the country's finances unsustainable in the long-run. EU's warnings will likely add to market pressure on Hungarian bonds and the forint.
Even though Hungary ran a surplus in 2011 and its deficit is expected to remain below the 3 percent of economic output allowed under EU rules, the Rehn said this was only due to one-time measures. Had Budapest not nationalized private pension fund to buffer state coffers, its 2011 deficit would have been 6 percent of GDP last year, he said.
The forint hit a record 321.40 forints against the euro last week.
On Wednesday, the forint was trading at 311.95 to the euro, while the yield on Hungary's 10-year forint bond was near 9.9 percent
Pablo Gorondi contributed from Budapest.