The move, announced by EU Commission President Ursula von der Leyen, means that Hungary becomes the first member state to potentially face funding cuts for breaching EU laws and standards.

"The Commission has today spoken to the Hungarian authorities that we will now send a formal letter to start the conditionality mechanism," Commission chief Ursula von der Leyen told members of the European Parliament on Tuesday, adding that there was a clear "corruption" problem in the country.

In March, members of the European Parliament adopted a resolution, giving their backing to the European Court of Justice's ruling in February that dismissed challenges by Hungary and Poland against the rule of law conditionality regulation.

The ruling allows the 27-nation bloc to suspend support payments to member states if they breach rule of law principles.

Hungary and Poland launched their cases after the EU introduced its rule of law conditionality mechanism in 2020, a regulation that links EU funds to adherence to the rule of law in the bloc.

In an interview with Austrian daily Tiroler Tageszeitung over the weekend, EU Budget Commissioner Johannes Hahn had said the mechanism would be triggered because of suspected corruption and public procurement issues.

Critics say mechanism watered down

The rule-of-law mechanism was created by the EU as a tool to withhold funds from member states that breach the rule of law, for example curtailing judicial independence or eroding the separation of powers.

In the event of such a violation, the Commission can submit a proposal to the European Council. A qualified majority —  55% of EU countries (15 out of 27) representing at least 65% of the bloc's population — is then needed for it to pass. 

Some observers criticize that the mechanism is too narrow in scope as it only applies to infringements involving EU funds and has thus been watered down from a rule of law to an anti-corruption mechanism.

"The fact that the EU has been incapable of sanctioning serious violations of rule of law principles for 10 years in the case of Hungary and five years in the case of Poland does not change with the mechanism," Hungarian constitutional lawyer Gabor Halmai, who teaches at the European University Institute in Florence, told DW in a recent interview.

Hungary and Poland are also embroiled in so-called Article 7 proceedings launched by the EU in 2018. This can be triggered when a member state is deemed at risk of breaching the bloc's core values. While the mechanism could ultimately remove a country's voting rights, such a step would require unanimous consent, which is seen as highly unlikely.

Last summer, the EU suspended payments from its pandemic recovery funds to the tune of €7.2 billion ($7.9 billion) to both Hungary and Poland over widely perceived democratic backsliding and corruption.