While Hungary's currency, the forint, slumped to new lows against the euro on Thursday, illustrating low investor confidence in Hungary's economy, the European Commission has said it would decide in "days or weeks" whether it will mount a legal challenge against controversial constitutional reforms adopted by Hungary's parliament last week.

Adopted thanks to a two-thirds parliamentary majority enjoyed by Prime Minister Viktor Orban's Fidesz party, critics say the reforms tighten his grip on state bodies meant to be independent, including the judiciary and the central bank.

"Our concerns remain, and will remain until the Commission has completed its legal assessment of these new laws," Commission spokesman Olivier Bailly told reporters on Wednesday.

European legal experts have been poring over official translations of the Hungarian reform bills to determine whether they are compatible with EU law and basic EU values before the bloc's 27 commissioners meet on January 11.

A full legal analysis of the Hungarian reforms could take days or even weeks

Once the analysis is over, the Commission "will decide on the next step," Bailly said.

Painful process

Bailly said the Commission's infringement proceedings, which can include action before the European Court of Justice as well as fines, would take several months if initiated

But some observers like Daniel Gros, director of the Center of European Policy Studies (CEPS), questions whether that would yield the desired results.

"If a government fails to enforce an EU directive about paperclips, for example, then the European Court of Justice can come along and say: 'Hey government, you have to pay one million euros a month until you've fixed it'. And the government will normally say: 'OK, we'd better act quickly.'"

Daniel Gros is the Director of the Centre for European Policy Studies in Brussels

With something as major as constitutional reform, however, going down that path could be like "banging your head against a brick wall," Gros added – especially if major EU powers remain passive.

"Just how the EU should deal with Hungary is certainly being discussed at the Commission. But Brussels will only have real authority in the matter if Berlin and Paris get on board."

Scant success

The European Commission initiated no less than 2,000 infringement proceedings against member states in 2010, but more than half of those cases were suspended.

Some were dropped because the governments in question addressed the complaints promptly, while others had to be abandoned because they were not legally tenable.

Many areas of legislation, such as media law and immigration, lie beyond the European Commission's sphere of influence. This can be very frustrating for European officials intent on righting perceived wrongs – as Justice Commissioner Viviane Reding discovered when she tried but failed to prevent Nicolas Sarkozy's government from deporting Roma from France last year.

Guy Verhofstadt says the Commission needs to up its game

Escalation possible

Guy Verhofstadt, the former Belgian prime minister who leads the European Parliament's third-biggest group, the Alliance of Liberals and Democrats for Europe (ALDE), urged the Commission to act swiftly to ensure freedom and democracy were fully upheld in Hungary.

"It is no longer a matter of 'exchange of letters' between the Commission and the Orban government," he said. "The time has come to initiate legal and political sanctions by the EU institutions."

Political expert Gros said exceptional measures can be taken if a member state is found to be in blatant violation of the European's Union's fundamental values.

"That would, of course, be the equivalent of going 'nuclear'," Gros said, adding that option had never been exercised by Brussels.

But Hungary's precarious financial position means it may not be necessary if the IMF applies pressure.

Financial leverage

Upcoming IMF/EU aid talks could be Brussels' best shot at influencing Budapest

The parliamentary group leader of Hungary's ruling Fidesz party, Janos Lazar, said the government was ready to make certain concessions to secure financial aid from the European Union and the International Monetary Fund (IMF).

"In some cases there will be an agreement, in some cases there will not be an agreement," Lazar told the MTI news agency.

Although Lazar made it clear Hungary needed help from the IMF and EU, he stopped short of identifying specific points up for negotiation.

"Only such compromises, agreements, decisions can come up which serve the interests of the country, as the servile behavior which characterized previous governments is not justified because the revenues and expenditures of this country broadly match," he said.

While the prospect of further concession is a step in the right direction as far as Brussels is concerned, some analysts fear it will be politically difficult for Orban to change his economic and other policies significantly, boding ill for future negotiations.

Author: Christoph Prössl, Sam Edmonds

Editor: Nicole Goebel