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Wednesday, Jan 11, 2012 4:09 PM UTC

EU Threatens Legal Action Against Hungary

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EU Threatens Legal Action Against HungaryEuropean Commissioner for Economic and Monetary Affairs Olli Rehn addresses the media at the European Commission headquarters in Brussels, Wednesday, Jan. 11, 2012. The European Commission says that Hungary has taken "no effective action" to contain its deficit within sustainable levels and is threatining the EU member with sanctions. EU Monetary Affairs Commissioner Olli Rehn said Wednesday that Hungary only remained within the 3 percent of economic output target last year because of one-time measures and expected the same would happen this year. (AP Photo/Yves Logghe)(Credit: AP)

BRUSSELS (AP) — 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 the country’s judges, its central bank and its 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 its 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 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.”

In a statement, the Hungarian government said it was “committed to universal European values” and was “ready for negotiations and to find solutions” with the Commission about any of its concerns.

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 remain independent.

Discussions between Hungary and the IMF resumed Wednesday in Washington.

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 Hungary 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 10.6 percent and the country may 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.

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, Rehn said this was only due to one-time measures. Had Budapest not nationalized private pension funds to buffer state coffers, its 2011 deficit would have been 6 percent of GDP last year, he said.

The forint hit a record above 324 per euro last week.

On Wednesday, the forint was trading at 312 to the euro, while the interest rate for Hungary’s 10-year forint bond was near 9.5 percent, an unsustainable burden. Three EU nations — Greece, Portugal and Ireland — had to seek international bailouts after their interest rates rose above 7 percent.

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Pablo Gorondi contributed from Budapest.

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