Hungary and Poland on Monday (16 November) blocked the adoption of the €1.8 trillion new long-term EU budget and the coronavirus recovery package, in their dispute over linking EU funds to the respect of rule of law.
At an EU ambassadors' meeting, the two countries blocked a key step in the process, the adoption of the EU's so-called "own resources" legislation, which sets out the revenue the bloc itself can raise.
Hungary's justice minister Judit Varga: 'It is not Hungary attacking Brussels and other member states with fabricated charges under the pretext of the rule of law, but it is them attacking us'
The EU commission said the adoption of the own resources decision is needed both for the 2021-27 EU budget and the recovery fund.
The two member states "expressed reservations" with regards to the rule of law conditionality, but "not to the substance" of the budget agreement, a spokesman for the German EU presidency said.
At the same meeting, a majority of member states adopted the rules on linking the distribution of EU funds to the respect of rule of law by member state governments.
Only Poland and Hungary opposed the adoption of the new mechanism.
Behind the scenes
The two countries are already under scrutiny over breaking EU rules and values in the Article 7 sanctions process.
Monday's block means neither the budget, nor the recovery funds - both crucial for pumping EU funds into a European economy ravaged by the pandemic - can be up and running any time soon.
A senior EU diplomat said earlier the blockage would throw the EU into a "crisis".
"We will be likely in crisis again. I cannot tell you exactly when all this will be up and running, certainly there will be delays," the diplomat added.
German chancellor Angela Merkel, European Council president Charles Michel, EU Commission president Ursula von der Leyen and EU leaders will now be involved in discussions on how to move ahead.
"There is already talks behind the scenes, and I expect this to increase, to find the way out of this crisis that we are about to hit this afternoon," the diplomat said on Monday.
Most national parliaments also need to ratify the 'own resources' decision, which has already meant money from the recovery fund would likely only start to flow to EU countries in the second quarter of 2021. That date now could be delayed.
EU leaders are scheduled to have a videoconference on Thursday, where the issue is likely to be raised. But diplomats warned it could be weeks before a solution is found.
"They broke it, they fix it," said another EU diplomat, referring to the two countries, adding that "by meeting [Viktor] Orban's demands, we don't solve anything".
The European Parliament - which still needs to vote on the EU budget in its plenary - is also unlikely to agree to water down of the rule of law conditionality.
Budget commissioner Johannes Hahn said he was disappointed by the outcome of the meeting.
"I urge member states to assume political responsibility and take the necessary steps to finalise the entire package.This is not about ideologies, but about help for our citizens in the worst crisis since the Second World War!," Hahn tweeted.
German MEP Manfred Weber, who hails from the same political family, the European People's Party (EPP), as Hungary's prime minister Viktor Orban, said that "everybody who respects the rule of law has nothing to fear of this mechanism".
"The Hungarian and Polish governments should stop creating this fictional opposition between themselves and the values that are part of our treaties. There is no such opposition. The peoples of Europe have one single enemy at the moment, and that is the coronavirus, and they expect us to deliver now," Weber warned in a statement.
The EPP has provided political cover for Orban's party for years but suspended its membership last year.
The German EU presidency and the European Parliament concluded talks on the EU budget and rule-of-law conditionality in the past two weeks.
The rule-of-law conditionality would mean that if there is a breach of EU values and rules that can be demonstrably linked to EU funds, the commission can then recommend the suspension or freezing of the funds, if the majority of member states concur.
EU leaders in July - where, during an epic five-day summit, they hammered out the main numbers of the long-term budget - also tried to define the rule-of-law conditionality, but the outcome was left vague.
And while Hungary and Poland had opposed the mechanism, the Netherlands, Finland, Denmark, Sweden, Luxembourg, Belgium and Austria have pushed for a stronger link.
Both Polish prime minister Mateusz Morawiecki and Orban have said they will block the key elements of the package.
In a letter to senior EU officials last week, Morawiecki said that Poland would not accept "any discretionary mechanisms that are based on arbitrary, politically-motivated criteria".
Hungarian government spokesman Zoltan Kovacs on Monday said the rule of law link "runs contrary" to the agreement of EU leaders in July.
Hungary also rejected accusations that it was blackmailing the EU.
"It is not Hungary blackmailing and putting pressure on Brussels in the EU budget negotiations, but it is Brussels blackmailing us," the country's justice minister Judit Varga said in a Facebook post.
"It is not Hungary attacking Brussels and other member states with fabricated charges under the pretext of the rule of law, but it is them attacking us," she added.