BRUSSELS (Reuters) - The European Union executive holds only limited leverage to stop ruling nationalists eroding the rule of law in Poland but they risk facing consequences including sharp cuts in EU funds that help develop the ex-communist state.

Poland's lower house of parliament members vote on a contested Supreme Court law in Warsaw, Poland, July 20, 2018. Agencja Gazeta/Slawomir Kaminski/via REUTERS

In power since late 2015, the arch-conservative, eurosceptic Law and Justice Party (PiS) is now speeding through parliament a law that would give the government more direct control of the country’s Supreme Court. It is the latest in a raft of bills that critics say are wiping out judicial independence.

Despite multiple calls to the contrary, the lower house of parliament passed the legislation on Thursday.

Exasperated by how PiS - which has also subdued public media and other courts - is undermining democratic standards in the country of 38 million people, the European Commission vowed to move ahead with an unprecedented Article 7 procedure.

That means asking EU governments to formally state that they regard the rule of law as being under threat in Poland, three decades after Poles overthrew the Moscow-imposed communist regime and put themselves on the road to EU membership in 2004.

But, while symbolically powerful, the Article 7 tool would require unanimity of all the other EU states to punish Poland. This is something Warsaw’s nationalist-minded and eurosceptic ally, Hungary, has promised to block.

PiS leader Jaroslaw Kaczynski knows that Poland is all but certain to escape the biggest potential punishment of having its voting rights in the EU suspended. It may be just about the only thing on which Poland’s chief powerbroker and Brussels agree.

“For these sanctions to take effect, it requires... mastering a 100 percent majority minus the state that is the subject of this procedure,” Kaczynski told state television on Wednesday night. “I am convinced that will not succeed.”

Brussels has launched several legal cases against Warsaw for undermining democratic checks and balances and these could eventually lead to hefty fines being slapped on Poland.

But PiS appears unfazed and so far offered no concessions, saying it has broad popular support to reform the country.

It dismisses criticism coming from Brussels - and from the liberal-centrist opposition at home, democracy advocates and many Western EU governments - as unacceptable political meddling in Poland’s domestic affairs.

Recalling the case of Hungarian Prime Minister Viktor Orban, diplomats in Brussels admit the EU has no hard tools to actually force a member state to do something if it chooses to ignore what are supposed to be basic values the bloc is built upon.

“The situation in Poland is quickly deteriorating, so there is a strong feeling we need to act, we are moving towards the first phase of Article 7. But at the end of the day - can we force them? Of course not,” one senior diplomat said.

“This is not what the EU is about; our means are limited. If the public mood there doesn’t turn around there is only so much we can do. But we have to react, it’s also about the EU’s face.”

Thousands of Poles have been protesting daily in Warsaw and other cities to demand that President Andrzej Duda, who also comes from PiS, use his veto power to block the judiciary law.

CONSEQUENCES

It so happens that Kaczynski’s arch-rival and also a former prime minister of Poland, Donald Tusk, now holds the prominent Brussels job of chairing EU leaders’ meetings.

Tusk also called on Duda to prevent the Supreme Court bill from entering into force, saying it was damaging, risked marginalizing Poland and ruining its reputation. Duda declined to meet Tusk on the matter.

The EU’s dilemma on how to act on Poland is compounded by the fact that PiS is using outside criticism to stoke euroscepticism at home and win points with their nationalist voters as defenders of Poland’s sovereignty.

Some EU politicians worry that piling pressure on Warsaw could feed a wave of EU-bashing similar to the one that has culminated last year in Britain’s vote to leave the EU.

Even if that sounds like political fiction now - support for EU membership is high in Poland - there will be consequences.

Though not immediate, they will still be painful for Warsaw, already increasingly ostracized in the EU after clashes with Brussels over migration and logging of a primeval forest.

As EU states brace for difficult talks over the bloc’s next joint budget - which may shrink given the departure of key net contributor Britain - countries like Italy and France suggest linking EU handouts to respecting key EU values.

“The atmosphere around Poland... these legal acts that are being worked on now will absolutely have a very negative impact on future budget talks,” said Elzbieta Bienkowska, Poland’s EU commissioner who is allied with Tusk and critical of PiS.