BUDAPEST/BRUSSELS (Reuters) - Under fire from its EU partners for a series of unorthodox policy initiatives, Hungary faces a rough ride when it takes over the rotating presidency of the bloc this week in the midst of a deep European debt crisis.
With Hungary at the helm, the 27-nation European Union faces major challenges, including the approval of changes to its main treaty to set up a new rescue mechanism for euro zone countries and the introduction of reforms to sharpen budget discipline.
Over the next six months, Hungary 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.
Under Budapest's leadership, 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.
EU diplomats say the tasks could be more difficult for Hungary because of international criticism of its new media law and controversial economic policies.
But Budapest could still prove successful 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 new institutions created by the Lisbon treaty to manage summits and broker deals.
"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."
Hungary's Prime Minister Viktor Orban, whose centre-right Fidesz party won a two-thirds majority in parliament in April, has rejected the austerity measures adopted by many of his European partners and launched a set of unconventional fiscal measures.
The latest move by Fidesz is a media law which tightens government control over news outlets.
The Hungarian government says the legislation, which is due to go into effect on January 1, will strengthen press freedoms by boosting transparency, and is in line with similar laws in other member states.
But it has provoked a sharp reaction from Budapest's EU partners.
Luxembourg Foreign Minister Jean Asselborn has said the law violates the "spirit and letter" of EU treaties and raises questions about whether Hungary is "worthy of leading the EU." Germany has said it expects Hungary to change the law, a step Orban has rejected..
LESS POWER FOR PRESIDENCY
Another EU diplomat said the media law would not necessarily lead to Orban being ostracised within the EU, pointing to the continuing influence of Italy's Prime Minister Silvio Berlusconi despite his control of Italian media.
But analysts agree that to make the Hungarian presidency a success, Orban will have to change the uncompromising, brash style that has gone down well with voters at home.
"You cannot behave like a bull in a china shop. The EU does not work like that," said Zoltan Kiszelly, a political analyst. "The EU is built on consensus, not conflict."
Orban will not be in the driver's seat in many areas, including foreign policy and the major decisions taken at EU summits.
Those will be overseen by the EU's high representative, Catherine Ashton, and the EU's permanent president, Herman Van Rompuy. Both posts were 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, of finances.
During Hungary's presidency, finance ministers should finalise the package of reforms to boost fiscal discipline.
REFORMS, CENTRAL BANK IN FOCUS
Hungary has pledged to be an honest broker, but diplomats say it does not help that its own house is not entirely in order.
The government's unconventional fiscal measures -- which include taxes levied on banks and mostly foreign firms and an effective nationalisation of private pension fund assets -- have prompted ratings downgrades and elevated Hungary's risk premia as investors worry that the deficit could swell after 2012.
Hungary escaped financial meltdown in 2008 thanks to a bailout of the EU and the International Monetary Fund.
By February, Hungary will have to present to the EU and investors a credible programme of structural reforms to prove it can keep the budget on a sustainable path.
If this package of reforms disappoints, the central European country could see its debt downgraded to junk status and face a sharp market selloff.
Orban's Fidesz party has already curbed the jurisdiction of Hungary's top court and placed people loyal to Fidesz at the top of public institutions in a consolidation of power that is expected to continue.
The government plans changes to 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. This is a risk investors are already pricing in.
(Editing by Noah Barkin)