ANALYSIS - Worthy or not, Hungary takes over EU presidency

Currency exchange rates are displayed at a money changer in Budapest, July 19, 2010.

BUDAPEST/BRUSSELS (Reuters) - Moves by the Hungarian government to tighten controls on the media and seize private pension assets are enraging its EU partners just as the country takes over the rotating presidency of the bloc.

The steps by Prime Minister Viktor Orban and his Fidesz party have elicited unusual public rebukes from Britain, Germany and Luxembourg, whose foreign minister openly questioned last week whether Hungary was "worthy" of leading the EU.

Berlin and other capitals have pressed Budapest to amend its new media law even before it goes into force, worried the clampdown could dilute the bloc's message on press freedoms to countries like Russia and become a distraction as Europe grapples with a debt crisis.

In a clear warning to Orban's government on Thursday, Germany's deputy foreign minister Werner Hoyer pressed Budapest to clear up concerns about the law "quickly".

"I assume the final word by the Hungarian government hasn't been spoken yet on this issue," he told the Frankfurter Rundschau newspaper.

A spokesman for the British Foreign Office had the same message, calling freedom of the press "the heart" of a free society and urging Budapest to reconsider its plans.

"We hope that the Hungarian government will soon resolve this issue satisfactorily and that it will not impact adversely on the successful delivery of the Hungarian EU Presidency," the Foreign Office said in a statement.

But Hungary is digging in its heels.

On Thursday, its president signed off on the legislation, which establishes a new national media authority packed with officials loyal to Fidesz, which will oversee all public news production and have powers to levy big fines on private media.

Orban, whose centre-right party won a two-thirds majority in parliament in April, has vowed to resist pressure to change the law, saying it has been misunderstood by foreigners unfamiliar with Hungary's domestic situation.

CRUCIAL TIME FOR EU

The showdown comes at a crucial moment for the 27-nation EU, which is preparing to approve controversial changes to its main treaty in order to set up a new financial rescue mechanism for euro zone countries and introduce new reforms to strengthen budget discipline.

During Hungary's six-month presidency, it will preside over the launch of sensitive talks on the EU's 2014-2020 budget, which will pit Britain, Germany and France against poorer countries from central and eastern Europe.

The bloc must also tackle divisive issues like the integration of its large Roma minority and a push by Bulgaria and Romania to join the Schengen free-travel zone.

To deliver results on these polarising issues, analysts say Orban -- a 47-year old lawyer who rose to fame in 1989 when he demanded Soviet troops leave Hungary during a reburial ceremony for former prime minister Imre Nagy -- will have to change the brash style that has lured voters at home but grated on Hungary's partners.

"You cannot behave like a bull in a china shop. The EU does not work like that," said Zoltan Kiszelly, a political analyst.

Less than a year into his term, Orban has shocked many outside Hungary by charting a policy course that contrasts sharply with the austerity ethos elsewhere in Europe.

Upon taking power he announced he would not extend a 20 billion euro loan deal with the EU and IMF that helped Hungary avert financial meltdown in 2008.

He has curbed the jurisdiction of Hungary's top court and placed people loyal to Fidesz at the top of public institutions in a major drive to consolidate his power.

Earlier this month, Orban won parliamentary backing to seize up to $14 billion in private pension assets in a shock move to cut the deficit.

His government is also pressing ahead with plans to change a law on how members of the central bank's monetary policy council are appointed, in what is widely seen as an attempt to force the bank into monetary easing to support its pro-growth agenda.

The European Central Bank has criticised the plan and investors have begun pricing in the risks from rising tensions between the government and national central bank.

EU DIPLOMATS PLAY DOWN IMPACT

Diplomats in Brussels play down the impact of Hungary's unconventional policies on the broader EU.

In the past, the bloc's bureaucratic machinery rumbled on during weak presidencies, although some deals were slower to materialise or proved elusive.

One example was the Czech stint at the EU's helm in early 2009, when the country's government collapsed and its President Vaclav Klaus actively preached his eurosceptic views.

Despite these obstacles, the EU managed to defuse a gas row between Russia and Ukraine, held a successful summit with U.S. President Barack Obama and clinched a deal with Ireland to secure its approval of the Lisbon treaty.

"Of course, Hungary's unorthodox measures will not help its presidency, but we should not exaggerate their impact," one EU diplomat said. "Its image is tarnished, but it is not the case that its work will be paralysed."

Budapest could prove successful, diplomats say, if it manages to steer the bloc through the myriad lower-level technical negotiations that will be necessary to bed down EU reforms, and relies on bigger countries and new institutions to broker tough deals.

Orban will not be in the driver's seat in many areas, including foreign policy and the steering of EU summits.

Those will be overseen by the EU's high representative, Catherine Ashton, and the EU's president, Herman Van Rompuy -- both posts created by the Lisbon treaty.

Major decisions affecting the euro zone are likely to be drafted by EU powerhouses Germany and France.

Still, Hungarian officials will preside over monthly meetings of ministers of agriculture, energy, environment, employment and, most crucially, finances.

(Editing by Noah Barkin)