The EU’s executive arm demanded Hungary reverse its controversial constitution changes or face possible legal action Tuesday, also threatening the crisis-hit country with sanctions for failing to rein in its deficit.

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AP - The European Commission stepped up its threat of legal action against Hungary on Wednesday over new policies it says may be unlawful and warned the country is failing to contain its budget deficit.

The EU warnings escalate the standoff between Hungary’s government and underline the difficulty Budapest will face in negotiating an international rescue package from the EU and the International Monetary Fund.

Hungary has been under pressure from the EU and other international institutions for passing a new constitution that the EU fears hurts the independence of judges, the central bank and the data protection agency.

Some civil rights organizations and the European Parliament have warned that the former Soviet-bloc country risks slipping back into authoritarianism under Prime Minister Victor Orban.

Commission spokeswoman Pia Ahrenkilde Hansen said the Commission was in the final stages of analyzing whether the new laws violate the EU treaty and would not shy away from using all its powers to fight any violations.

The new constitution came into force just weeks after Hungary requested financial aid from the EU and the IMF. The two institutions broke off preliminary talks on the rescue package in December, after it voiced fears that they endangered the independence of the Hungarian central bank, which is enshrined in EU treaties.

The Commission also said Hungary has taken “no effective action” to limit its deficit. Because Hungary does not use the euro, the EU does not have the power to impose financial sanctions on the country. But the bloc has significant leverage on Budapest, which has asked for a credit line from the EU and the International Monetary Fund.

Economic Affairs Commissioner Olli Rehn also warned that the EU could eventually withhold development funds if Hungary continues to not take action of its deficit.

The EU’s warnings will also likely add to market pressure on Hungarian bonds and its currency, the forint.

The determination by the EU that Hungary’s deficits are unsustainable is the first of a number of measures against Hungary expected in the coming weeks.

Even though the country ran a surplus in 2011 and its deficit is expected to remain below the 3 percent of economic output allowed under EU rules, the European Commission said that this was only due to one-off measures. In 2013, Hungary’s deficit is expected to top 3 percent once again.

The Commission has been requesting Budapest to make longer-term reforms that would put its finances back on a sustainable path – demands that Hungary has so far rejected.

Belgium, Cyprus, Malta and Poland, four other countries that had been warned about their deficits, meanwhile took relevant measures and do not risk penalties at this point, the Commission said.

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