EU member states that fail to live up the European Union’s democratic values could find parts of their EU subsidies being “frozen” until they mend their ways, The Telegraph understands.

Under proposals to be unveiled in Brussels this week by Guenther Oettinger, the EU’s budget commissioner, Eastern EU states like Poland and Hungary could feel a financial squeeze if they were deemed to have failed to live up to the founding values of the EU.

The move comes after pressure from liberal groups in the European Parliament and leading western powers like France and Germany, who want to find a mechanism to put pressure on recalcitrant member states.

“The precise details are still to be worked out, but the proposal will include the temporary freezing of funds in order to motivate a change of behaviour among states,” said an EU source briefed on the document.

Poland and Hungary are both major recipients of EU ‘structural funds’ which are designed to narrow the gap between rich and poor member states, each receiving €5.5bn and €2.7bn respectively a year.

Hungarian Prime Minister Viktor Orban is on a collision course with the EU after his emphatic election victory credit: REUTERS/Bernadett Szabo

Sources said the threat to freeze access to funding for projects could also include agricultural subsidies, but would not include student programmes like Erasmus to avoid punishing citizens for the misdeeds of their governments.

Reports also suggest that new formulas for calculating payments will mean that southern EU states, who tend to adhere closer to liberal values, will receive higher payments when the next 7-year budget cycle begins in 2021.

The decision to link EU payments to ‘good behaviour’ is highly controversial and risks deepening the stand-off between western Europe and the populist governments in Warsaw and Budapest.

Tensions have deepened over the last two years after eastern EU countries refused to accept refugee resettlement quotas following the 2015 migrant crisis, and Poland introduced judicial reforms judged anti-democratic by the EU.

The recent re-election campaign of the Hungarian Prime Minister Viktor Orban, which was marred by anti-semitic rhetoric, corruption scandals and warnings from OSCE election monitors about a lack of free media, only deepened concern in Brussels.

Poland is currently battling Brussels over an ‘Article 7’ disciplinary procedure for breaches of EU commitments to maintain the ‘rule of law’, but is protected from serious punishment by a Hungarian promise to veto any sanctions.

EU sources said the plan to explicitly link EU payments to democratic standards was in part driven by a French and German desire to have a less draconian and more flexible mechanism for pressuring states that were falling short.

They added that the Commission would have to negotiate a system for deciding when payments would be frozen - but leading western states, like Germany, want it based on majority voting to avoid the kind of protective vetoes that have neutered the Article 7 process.

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However an Eastern EU diplomatic source said that any attempt to connect funds to the “proper functioning of the judicial system in a member state” would be a matter of serious concern, raising questions about fairness and due process.

“Who would assess the state of the judicial system and on what grounds? Wouldn’t there be a risk of political pressure and arbitrariness in such an assessment? Our position will depend on the shape of the proposal, but the budget must be governed by the law, not by arbitrariness,” the source said.

Liberal forces have become increasingly agitated that states like Poland, Hungary but also Bulgaria and Romania - who joined in 2007 - are flouting EU norms with impunity, revelling in what Mr Orban has called “illiberal democracy”.

When former Soviet-bloc states joined the EU in 2004, they signed up to values founded on “freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities.”

Now Mr Orban has talked openly about pursuing the “Hungarian model” which contests western interpretations of the EU’s statement on values.

Guy Verhofstadt, the leader of the liberal ALDE grouping in the European Parliament and a trenchant critic of Mr Orban, welcomed the Commission proposal.

"It is grotesque for EU tax-payers’ money to be spent propping up the vanity projects of illiberal ruling elites who politicise their own judiciaries, erode democratic safeguards and systematically attempt to undermine NGOs and the free press,” he told The Telegraph.

“From 2020 onwards, it is essential that cohesion funds are made conditional on full compliance with the rule of law and our European values of democracy and freedom."

A spokesman for the Commission declined to comment on the forthcoming proposal which will cover the EU budget for 2021-2027, which has already been complicated by the €10bn-€15bn a year shortfall left by the UK’s departure from the EU.

Reports suggest that the Commission will propose a budget between 1.1 and 1.2 percent of the bloc’s gross national income - an increase from the current 1.0 percent which results in a seven-year 1 trillion euros budget.