EU threatens action against Hungary over deficit
Hungary has taken "no effective action" to contain its budget deficit, the European Commission has said.
As a result, the country could lose access to EU development funds.
The commission also threatened Hungary with legal action over its new constitution, saying that some measures may violate EU law.
It raised concerns about the independence of its central bank and its national data protection authority, and early retirement in the judiciary.
Hungary's budget deficit has consistently exceeded the EU's target of 3% of GDP since it became a member in 2004.
Although it remained within the 3% target in 2011, the commission said it had only done so thanks to one-off measures and had "not made sufficient progress towards a timely and sustainable correction of its excessive deficit".
The commission proposed to "move to the next stage of the Excessive Deficit Procedure".
"Hungary has not taken effective action," EU Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.
"As Hungary is not a member of the euro, it won't face the prospect of a financial sanction.
"It could nevertheless face a suspension of commitments from the cohesion funds from next year, from January 2013 onwards," he added, referring to the EU's long term-term aid to poorer member states.
The commission also said that Belgium, Cyprus, Malta and Poland - other countries tasked with correcting excessive deficits - had taken effective measures to keep their budgets within line.
Former Hungarian finance minister Lajos Bokros told BBC World News that he was not surprised by the commission's assessment of his country.
"Apart from nationalising the mandatory pension system, the government was unable to introduce any national measure to bring down the deficit," he said.
Further austerity measures were inevitable, he said.
"There is no growth while the public debt is above 82% of GDP. There is no other way but to stomach austerity measures."
International lenders are expected to demand tough conditions from Hungary this week in exchange for new loans.
Analysts say Prime Minister Viktor Orban will have to give up some of his unconventional policies, which have included big taxes on banks and what amounts to a nationalisation of pension funds.
The nation received an IMF-led bailout in 2008, but Mr Orban ended that deal, which had been agreed under the previous government, last year.
However, since then the government's total debt has risen to 82% of its output, while its currency, the forint, has fallen to record lows against the euro, leading to the country requesting "a new type of co-operation" with the IMF.