A mechanism tying payouts of EU funds to member states’ adherence to the rule of law is legal and within the bloc’s powers, the Court of Justice of the European Union (CJEU) ruled on February 16.

The ruling is a tectonic move that puts Poland and Hungary up against the wall in their spat with Brussels over how far member states can change their domestic legal orders without respecting EU laws.

It opens a way for the Commission to stop payouts to member states where disregard for rule of law, as set out in in the Treaty of the European Union (TEU), the bloc’s founding document, might impinge on sound spending of EU funds

Poland and Hungary – which are at loggerheads with Brussels exactly over problems in adhering to the rule of law – the ruling could mean that billions from the EU’s budget might become unavailable.

Poland and Hungary are both ruled by populist and Eurosceptic parties with a track record of infringing upon basic rights and freedoms. At the same time, Warsaw and Budapest are keen to make use of billions in funding from the bloc’s common budget, as that could be instrumental in winning the next election.

There is a general election in Hungary as soon as April 3. Poland’s ruling Law and Justice (PiS) party will stand to a test at the polling stations in the autumn of 2023.

The CJEU ruling tops a series of its recent rulings, as well as those by the European Court of Human Rights (ECHR), that pointed to Polish and Hungarian governments’ democratic backsliding.

In Poland, the spat has centred around the government’s judicial reforms, which the EU says are compromising courts’ independence and impartiality by handing over the process to appoint judges to the parliament.

In Hungary, the list of concerns includes academic freedom, migration and asylum laws, as well as discrimination against the LGBT community. The EU also has concerns about corruption and media freedom.

“The sound financial management of the Union budget and the financial interests of the Union may be seriously compromised by breaches of the principles of the rule of law committed in a member state,” the CJEU said in the ruling.

Poland and Hungary argued that the rule of law mechanism had no legal basis in the TEU and the bloc’s other rudimentary document, the Treaty on the Functioning of the EU.

The two countries also said that the mechanism constituted overstepping of EU powers and breached of the principle of legal certainty.

The CJEU dismissed those claims in their entirety, eliciting fury in Warsaw and Budapest.

“This is a historic moment that shows changes in the European Union. From the area of freedom, the EU is changing into an area where it will be possible to use unlawful violence in order to take this freedom away from member states and limit their sovereignty,” said Poland’s Justice Minister Zbigniew Ziobro.

“The decision is living proof that Brussels is abusing its power. This is another pressure against our country only because we adopted our law on child protection last summer,” Hungary’s Justice Minister Judith Varga said, referring to a law that many see as conflating sexual diversity with paedophilia.

The option to challenge the rule of law mechanism in the CJEU was written into the compromise deal reached during an EU summit in December that overcame Polish and Hungarian opposition to adopting the bloc’s €1.1tn long-term budget for 2021-2027 as well as the coronavirus recovery fund, worth €750bn.