EU plans to link some budget funds to respect for the rule of law will be part of the grand bargain at EU leaders' negotiations on Thursday's (20 February) summit over the bloc's spending plans.

It is one of the key issues dividing member states in a budget haggle that has been described by EU officials as the most divisive in decades.

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Several EU affairs ministers criticised the recent proposal from EU Council president Charles Michel - which they argued waters-down a possibly efficient instrument to uphold the rule of law.

"It was a was huge disappointment," said one EU diplomat of the mood at a meeting on Monday.

The EU Commission in its original budget proposal for the 2021-27 period, two years ago, introduced plans for the possibility of suspending EU funds to countries where deficiencies in the functioning of the rule of law impacts the use of EU funds.

That so-called "rule of law conditionality" came as a response to criticism that the EU is unable to handle countries where there is backsliding on the independence of the judiciary and misuse of EU funds.

It was the first time that a budget plan would link the disbursement of EU funds to member states' record on upholding the rule of law.

Poland and Hungary, which are under EU scrutiny partly for attempts to put the judiciary under political control, have rejected the plans vehemently.

Poland called it a "massive power grab" by the commission, Hungary labelled it as "blackmail" and said it could veto the budget over the issue.

The subsequent plans for the seven-year EU budget put together by the Finnish EU presidency last December, in line with the commission's proposal, said measures could only be stopped by a qualified majority of countries (called "reversed qualified majority" in EU jargon).

Michel, in his plans for a compromise deal put forward last Friday, changed that criteria, and suggested that a qualified majority of member states should approve sanctions proposed by the commission.

That would make it easier for Poland and Hungary, or other countries where such deficiencies occur, to muster a blocking minority.

Michel also narrowed down the scope where the deficiencies would be scrutinised: to good governance of authorities, from a general rule of law focus.

'Should bite'

Germany's finance minister Olaf Scholz on Monday called this proposal a "setback".

Finland's EU affairs minister Tytti Tuppurainen said Michel should strengthen the compromise's "wording" on conditionality.

"Our citizens expect a strong and feasible rule of law mechanism in the MFF [multiannual financial framework, i.e. EU budget] context, something that also works in practice. Rule of law cannot be a dead letter in the MFF writings," she said on Monday in Brussels.

The Netherlands will also want to see a stronger link between rule of law and the disbursement of EU funds, and a return to the Finnish proposal.

"It should work, it should not only be a paper reality, but an actual regulation that can bite. We are worried that it is watered down," said one diplomat.

A senior EU official on Tuesday said the commission is "confident" that a majority can be found among member states in the council if there are deficiencies in a country, "even if the threshold was raised".

Those criticising Michel's attempt at a compromise were not so confident, however.

They point to the Article 7 sanctions procedure triggered by the commission against Poland in 2017 (and by the EU parliament against Hungary in 2018), where member states have yet to take a position as the process drags on.

"I am quite disappointed, the European Parliament and my political group in particular, has been adamant that rule of law conditionality must be a critical component of the budget," Michal Simecka, liberal Slovak MEP tasked with overseeing legislation on an EU mechanism on democracy, and rule of law, told EUobserver.

"The reversed majority, which was the starting point, is the most effective and credible way of addressing the issue," he said adding that "the council [of member states] has a poor track record in addressing rule of law issues in the Article 7 procedure."

"Going into negotiations and already watering-down the proposal is fairly disappointing. The majority of MEPs and EU citizens don't want to see authoritarian regimes on the back of EU subsidies," he said.