In January 2011, the government of Hungarian Prime Minister Viktor Orban announced that the 82-year-old philosopher Agnes Heller and four other academics would be investigated for the misuse of nearly $2.5 million in public grant money. The same day, the country's leading conservative newspaper, Magyar Nemzet -- a supporter of Orban -- published a bracing attack on the professors. Other right-wing publications and television channels followed suit, derisively referring to the "Heller gang" which had "researched away" government money. The investigation, such as it was, lasted for nearly two months before being quietly put to bed with no evidence of wrongdoing.

Agnes Heller did not strike me as the sort of woman who would pose a threat to Orban when I visited her small, messy flat in a Budapest apartment overlooking the Danube River in February. She is about four feet tall and seems more like a doting Jewish grandmother than a corrupt political functionary. After surviving the Holocaust, and thus avoiding the fate of some 450,000 of her fellow Hungarian Jews, Heller studied under the renowned Marxist philosopher Gyorgy Lukacs at the University of Budapest. Heavily influenced by Lukacs' critique of Stalinism (he had served briefly as a minister in the revolutionary government of Imry Nagy which was violently put down by the Soviets in 1956), she eventually became an outspoken opponent of Hungary's communist regime and was forced into exile in 1977. Now, she mainly spends her days overseeing graduate students and enjoying semi-retirement. "I have not picked up one single penny," Heller told me when I asked her about the allegation that she had stolen government money.

To some in Hungary, the attack on Heller and her colleagues reflected a coordinated campaign against Orban's most outspoken critics. Heller has publically chided Orban for what she terms his "dictatorial inclinations" and testified against his policies at the European Parliament. "It was so well orchestrated, it doesn't happen by accident," Gabor Horvath, an editor for the daily Népszabadság, told me about the investigation and the accompanying media attacks. "This is character assassination."

The assault on the philosophers is just one example of the disturbing turn away from free and open democracy in Hungary that has taken place since Orban came to power in April of 2010. A day before the government announced its investigation of Heller, some 60 European luminaries, including the late Vaclav Havel, published an open letter decrying the state of affairs. "Hungary's government," the letter warned, "is misusing its legislative majority to methodically dismantle democracy's checks and balances, to remove constitutional constraints, and to subordinate to the will of the ruling party all branches of power, independent institutions, and the media."

Greece's economic peril has raised fears about the end of the eurozone. But Hungary presents as much of a fundamental challenge to the European Union, just more a political than an economic one. Hungary today is the first member state of the EU, a body that prides itself as the embodiment of classical liberal values, to tack sharply toward autocracy. Supporters of the EU often claim that it has the power to nudge the nations in Europe's periphery toward democracy. But the EU has never been confronted with this level of democratic backsliding from one of its own members. Indeed, were present-day Hungary to apply for EU membership now, it would not likely be admitted. The fate of the country over the next several years will test the foundational principles of the entire European project.

RIGHT-WING RISING

Of all the nations in the Soviet sphere, Hungary, it seemed, should have made the smoothest transition to liberal democracy. Beginning in the 1960s, Communist Party leader Janos Kadar governed by what became known as "Goulash communism," mixing market principles and limited personal freedoms with authoritarian state control. Under Kadar, Hungary became more liberal than any of the other Soviet Bloc regimes in Central and Eastern Europe, earning the moniker, "the happiest barrack." It was the Hungarian government's decision in May 1989 to remove its border fence with Austria which precipitated the fall of the Berlin Wall five months later.

Orban was among the dissidents who opened Hungary to the West. In 1988, as a 25-year-old law student, he founded Fidesz (an acronym for "Alliance of Young Democrats") with a group of his classmates. Fidesz, a liberal party in the Western model, called for Hungary to adopt a market economy and a firm orientation towards Europe. The following year, Orban delivered a speech in Budapest's iconic Heroes' Square calling for the removal of Soviet troops from his country -- the first dissident in the Eastern Bloc to make such a demand.

In the mid-1990s, however, the party moved right. Peter Molnar, a classmate of Orban's and a co-founder of Fidesz, told me that the shift was a cynical electoral strategy. By the time of Hungary's second national election in 1994, the then-ruling conservative Hungarian Democratic Forum (MDF) collapsed. Suddenly, a gap opened on the nationalist right, long a large constituency in Hungary. "I remember sitting in a parliamentary group leaders' meeting when someone argued that there is a free space, an opening up of space on the center-right," Molnar recalls. "'We should move there,'" this person suggested. "Some of us were shocked of course because we did not think that we belonged to that place, and more important, we of course thought that we don't choose our politics by where there is 'space,'" Molnar said. He was in the minority, however, and under Orban's leadership, Fidesz soon shifted to the space once occupied by the MDF and cancelled its membership in the Liberal International. In 1998, the party gained control of parliament and Orban became prime minister, serving until 2002.

Orban has dominated Fidesz since its creation. "People who surround him certainly have this type of admiration, that he's a sacred figure," Endre Bojtar, editor of the liberal weekly Magyar Narancs, told me. This admiration used to be more widespread; Western officials involved in Eastern Europe's post-communist transitions saw him as a favored son. "He was a major democrat," Mark Palmer, the American ambassador to Hungary during the last year of communist rule, said in an interview, "someone who, in my own mind, was as clear-headed about what Hungary needed and as European-oriented as anyone and courageous as anyone." But now, Palmer concedes, Orban has changed. "Even the best of us can be corrupted by power. And that's what I really think is what's happened."

In April 2010, Fidesz returned to power after defeating Hungary's socialist party in national elections. Although it won only 53 percent of the vote, due to the particularities of Hungary's electoral system, it gained a two-thirds majority in the single-chamber house along with a small Christian Democrat party. Almost immediately, the coalition pushed through a raft of controversial reforms.

The most prominent of these was the creation of a commission that can fine journalists and media outlets nearly $1 million for unspecified assaults on "human dignity." Although the commission, whose members were all appointed by Fidesz, has yet to penalize anyone, many Hungarian journalists told me that the body has had a chilling effect. On top of this, state-funded media outlets, Hungary's leading news sources, have been gradually staffed with Fidesz loyalists. "What they mean by journalism is culturally closer to what the role of journalists was during the eighties than today," Attila Mong, a former public radio news broadcaster who was fired in 2010 for holding a minute of silence in protest of the media law, told me.

The party has also solidified its power through legislation. Last December, it cut the number of parliamentarians in half and gerrymandered the country's districts to extend its advantage. The government also lengthened the terms of office for an array of powerful positions filled with Fidesz members, from seats on the media commission and budget council to the public prosecutor. In the unlikely event that Fidesz loses the next election in 2014 or sees its current majority reduced, these Fidesz-appointed officials will remain in place.

Meanwhile, in January 2012 the parliament adopted a new constitution, which Fidesz had entered into discussion only two weeks earlier. (The party's campaign platform included no mention of a rewritten constitution). The document removed the word "Republic" from the country's official title, defined marriage as a union between a man and woman, and specified that life begins at conception. It also changed the legislative process, requiring a two-thirds majority to pass laws on many major issues such as tax and fiscal policy. This is not difficult for Fidesz now, but critics fear that it will raise barriers for subsequent parliaments. In fact, Orban admitted in an interview with an Austrian newspaper last year that by implementing the new restrictions, he is "tying the hands of the next government, and not only the next one but the following ten."

The new constitution also lowers the mandatory retirement age for judges from 70 to 62, forbids the Constitutional Court, Hungary's highest judicial body, from reviewing legislation pertaining to the budget, and renders it more difficult for individuals to challenge the constitutionality of laws. The constitution also established a National Judicial Office whose leader -- the wife of a Fidesz European Parliament member -- enjoys the sole power to pick and replace judges.

As last year's attack on the liberal philosophers demonstrated, Fidesz wants to expand its hegemony beyond politics as well, hoping to create what Orban has referred to as, "a new, modern, right-wing culture." Last October, Orban appointed a Fidesz member of parliament to run the National Cultural Fund, once an independent body that disbursed government subsidies for the arts. Then, this past February, the actor Gyorgy Dorner was installed as director of Budapest's publicly funded New Theater, appointed by Budapest's nominally independent but Fidesz-friendly mayor. Dorner is a supporter of Jobbik, an extreme right-wing party that rode Fidesz's coattails in the 2010 election to become the third largest faction in Hungary. (Jobbik members don uniforms reminiscent of the country's wartime fascist Arrow Cross Party, and its leaders routinely rant about "Gypsy Crime." This past April, a Jobbik member of parliament read the lurid details of an infamous, anti-Semitic Hungarian blood libel from the floor of parliament.) In his application for the job, Dorner pledged to rename the institution "The Home Front Theater" and assailed the "degenerate, sick, liberal hegemony" which allegedly rules the Hungarian art world. Late last year, Dörner announced the playwright Istvan Csurka, one of the country's most vocal anti-Semites, as his co-director. Csurka had complained of a "Jewish occupation of literature," and "a swamp where non-Jewish writers have no chance to present their works." The announcement of Dorner's selection caused international shock and protest, and Csurka's nomination was withdrawn shortly before he passed away in February.

Orban has justified the broad changes by arguing that Hungary has only now, with his party's resounding electoral victory, become a genuine democracy. Fidesz describes the 2010 election as a "ballot box revolution," a conscious link to the failed 1956 uprising against the Soviet Union that ended in bloodshed and repression. When I visited Zoltan Kovacs, Hungary's minister of communications, in his Budapest office in February, he echoed Orban's defense. "You know what the original meaning of the word revolution is?" he asked me. "To return to the original point. And we are trying just to return to a democratic tradition that used to exist in this country before the coming of communism, and, before the coming of fascism and Nazism." In referring to the interwar period, Kovacs linked back to Miklos Horthy, the quasi-dictator who ruled Hungary from 1920 until 1944 and whose image is popping up all across the country in newly erected statues and busts. Kovacs alleges that Western criticism of Hungary is subconsciously influenced by centuries-old prejudices painting the eastern part of the continent as uncivilized and backwards. But the alleged "democratic tradition" of Horthy's Hungary, the first state to pass an anti-Semitic law in the aftermath of World War I, is hardly one that would fit most people's conception of democracy.

HUNGARY FOR POWER

As much as Orban has changed Hungary's domestic character, he has changed its foreign policy orientation as well. Maps of the country two-thirds larger than its present size now plaster cars, postcards, and bars. This is the image of Greater Hungary, which existed for centuries until the post-World War I Treaty of Trianon carved up the Austro-Hungarian Empire. It included present-day Slovakia, parts of Croatia, Romania and Serbia. A kitschy emblem of Hungary's imperial nostalgia, it also represents a fundamental ambivalence among Hungarians about their position within Europe and attitude toward the EU.

This past January, the European Commission, the executive branch of the EU, launched an "accelerated infringement procedure" against Hungary in response to its new constitution. The action compels the Hungarian government to comply with EU statutes or face sanctions and possible expulsion. In particular, the EU cited Hungary's media law, its changes made to the judiciary, and its infringements on the independence of the Central Bank and National Data Protection Office as potential violations. The following month, the European Parliament passed a resolution deeming the new constitution "in conflict with common European values of freedom and democracy." In March, the EU's constitutional advisory board stated that the constitution breaches several EU conventions, particularly the power it invests in the new head of the National Judicial Office. "Although (member states of the Council of Europe) enjoy a large margin of appreciation in designing a system for the administration of justice, in no other member state are such important powers -- including the power to select judges and senior office holders -- vested in a single person," the board stated. This coming October, the Council of Europe, a 47-member body which promotes continental cooperation regarding rule of law and democratic standards, will decide whether or not to place Hungary under official "monitoring," whereby it would evaluate the Hungarian government's commitment to the European Convention on Human Rights.

In January, the EU called Orban to Brussels to address some of its concerns. The prime minister struck a conciliatory note, telling the EU Parliament, "I thought it appropriate to be at your disposal, to let you receive first-hand information on the intent of the government of Hungary." He did so partly in thanks to Hungary's dire economic situation. The country is suffering from 12 percent unemployment and is expected to be the only country in Eastern Europe not on the euro whose economy will shrink this year. Orban needs EU support for a bailout from the International Monetary Fund.

Yet back in Hungary, Orban has voiced profound antipathy toward Europe. In March, just two months after his deferential remarks in Brussels, he delivered a fiery speech in Budapest before tens of thousands of people comparing EU criticisms of his government to the Soviet Union's violent invasion and decades-long occupation of Hungary, declaring that, "We are more than familiar with the character of unsolicited comradely assistance, even if it comes wearing a finely tailored suit and not a uniform with shoulder patches." Hungarians, he claimed, were part of "a silently abiding Europe of many tens of millions, who still insist on national sovereignty and still believe in the Christian virtues of courage, honor, fidelity, and mercy, which one day made our continent great."

Indeed, under Fidesz, such nationalism has replaced the pan-Europeanism of the past. The party has granted citizenship to Hungarian minorities living abroad (many ethnic Hungarians are scattered among neighboring countries-a lingering consequence of the post-World War I Trianon Treaty) and has formed alliances with Hungarian nationalist leaders living in bordering countries. On June 4, 2010, the 90th anniversary of the signing of Trianon, the government bemoaned "the unjust and unfair dismemberment of the Hungarian nation by foreign powers," and stated that the division of Hungary created "political, economic, legal and psychological problems that to this day are not solved." And in May, the Fidesz Speaker of the Hungarian parliament traveled to a small town in Transylvania, (now part of Romania but once in Greater Hungary), to attend a reburial ceremony for a long-dead Hungarian writer and politician, Joseph Nyiro, who had been a supporter of the war-time fascist Arrow Cross Party.

Ferenc Gyurcsany, the socialist prime Minister of Hungary from 2004-2009, summed up Fidesz's nationalist mindset for me when we met in February: "Everybody's our enemy. And we are standing alone, we have to protect ourselves."

EUROPE'S DEMOCRACY CRISIS

One of the undisputed accomplishments of the EU was to help entrench democratic regimes in post-authoritarian states such as Greece, Portugal, Spain, and the former communist bloc. That is why Hungary presents a major and unprecedented test. The democratic bona fides of EU member states have long been taken for granted. European leaders have rarely, if ever contemplated the notion that an EU country would slide into authoritarianism and possibly risk expulsion from the body -- a prospect that they must now confront. "I think, when [the Hungarians] get to the point where objective organizations view them as not free," former U.S. ambassador Mark Palmer told me in a phone interview, "the EU would have to suspend them." Writing in the Washington Post in February, Palmer called upon the U.S. government to resume Radio Free Europe Hungarian-language broadcasts into the country, which ceased in 1993. And with good reason: Hungary recently fell short of an important benchmark when Freedom House, the watchdog organization that monitors basic rights around the world, lowered the country from "Free" to "Partly Free" in its annual press freedom rankings.

Suspension by the EU would be an unprecedented move. The harshest punishment that the confederation has imposed on a member was when it placed sanctions on Austria in 2000 after that country's far-right Freedom Party, led by a man who had kind words for Adolph Hitler, joined a ruling government coalition. Those measures, however, did nothing to abate the popularity of the Freedom Party. The situation in Hungary is significantly more serious as it concerns tangible policies that a government with a massive parliamentary majority has already enacted and thus far seems unwilling to relinquish.

Nonetheless, it is incredibly difficult to imagine a situation in which the EU suspends or expels Hungary. The union is so preoccupied with the fiscal crisis that Orban's creeping authoritarianism has received little attention. Moreover, the prevailing temperament among European leaders is to avoid conflict; they prefer to think that repeated condemnation will eventually convince Orban of the imprudence of his ways rather than consider the possibility that they may need to take harsh measures.

For now, the battle for the future of Hungary will ultimately play out within the country itself, where voters must decide whether to arrest their country's autocratic slide. Such an effort, unfortunately, does not appear likely. Although Fidesz has lost support since 2010, it still remains the most popular, with the neo-fascist Jobbik practically tied for second with the socialists. Civil society groups have organized several large protests against the government over the past two years, but the opposition remains divided between the socialists, a breakaway faction led by the former Prime Minister Gyurscany, and a new Green Party.

According to Heller, the struggle for Hungary's future is emblematic of one that has perpetually played out across Europe. Hungary's years of socialist government, plagued by economic mismanagement, not only left many craving a change in the country's leadership, she said, but also caused some to question the basic precepts of liberalism itself. Hungary's present condition, then, is a symptom of a trend sweeping Europe: the rise of extremism, left and right, from Greece to France. "Liberalism is a word of abuse in Hungary," she told me "If you are liberal that means that you are a Nazi or you are a Stalinist or whatever 'liberal' is." Heller, whose life was shaped by Europe's twin totalitarian legacies, sighs as if she's seen this drama before. "If people feel themselves betrayed by the republic, then they turn to the strong man who will solve all their problems."

To be sure, Hungary is not a dictatorship. Since Orban came to power, it has remained "free" on the Freedom House ranking. "There is no autocracy without the black cars stopping in front of your house and staking you away," said says Endre Bojtar, the liberal magazine editor and a fierce critic of Orban. Although Fidesz has not turned Hungary into a full-fledged authoritarian state, it has undermined the spirit of democracy, chilling speech and dissent. In that sense, Viktor Orban -- once the great hope of a united and liberal Europe -- has failed the democratic test. It is up to Hungarians, and those interested in the future of democracy in Europe, to see that his failure does not become the continent's as well.