The warning, issued Wednesday by the union's executive arm, the European Commission, was in response to the passage of a new constitution and many laws last year that erase the checks and balances on Prime Minister Viktor Orban's government in areas such as central banking, the judiciary and the media, The New York Times reported.
Separately, Olli Rehn, the European Union's commissioner for economic and monetary affairs, warned Hungary could face possible suspension of EU development aid unless it worked harder to control its budget deficit.
Thorbjoern Jagland, secretary general of the Council of Europe, told the Times, "[There's] a real danger of Hungary going off the rails."
The council, based in Strasbourg, France, is responsible for enforcing the European Convention on Human Rights.
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