EU leaders in high-stakes poker with Poland and Hungary

Hungary's prime minister Viktor Orbán, Poland's premier Mateusz Morawiecki, and Slovenian prime minister Janez Janša took the floor to reaffirm their objection to linking EU funds to governments' adherence to the rule of law - although Slovenia did not block the budget package.

European Council president Charles Michel coordinated with member states' delegations to avoid a full-blown and, what is commonly seen, as a futile debate at leaders' level on the toxic issue.

The German EU presidency will take the lead at a lower, expert level in negotiations between the key supporters and opponents of the rule-of-law conditionality in the next weeks instead.

"There is consensus on the EU budget, but not on the rule-of-law mechanism," German chancellor Angela Merkel said after the meeting.

"This means we have to continue talking with Hungary and Poland," she added.

The recovery fund and the budget was planned to be operational next year, but a delay is now almost inevitable, although European countries urgently need EU support, as the pandemic erodes their economies.

The rules linking EU funds to the respect of rule of law had been negotiated by the German EU presidency and the European Parliament earlier this month, and the new mechanism was backed by 25 member states.

The parliament had planned to vote on it next week, but that will be delayed as negotiations continue, aiming to bring Poland and Hungary on board.

It remains to be seen what compromise could be found and how far the two prime ministers are willing to go.

One idea is to give additional "clarification" on the rule-of-law conditionality that could alleviate concerns in Hungary and Poland that the mechanism would be used against them as a political tool.

Another idea being floated is to postpone the entering into force of the rule-of-law conditions, while the European Court of Justice forms an opinion on the mechanism.

Both ideas could upset the EU parliament, whose consent is also needed for the budget to go ahead, and which said on Wednesday that it will make "no further concessions" on the rule-of-law mechanism, however.

Dutch prime minister Mark Rutte also said, on Wednesday, that what has been negotiated on the rule of law was a "bare minimum" for him.

German diplomats will now have to walk a very fine line between the tough positions under extreme time pressure.

EU leaders are due to gather in mid-December - whether virtually or in person, depending on the pandemic - in talks which could seal a deal, if there is one by then.

France and the Netherlands suggested that redesigning the recovery fund into an intergovernmental agreement - without Poland and Hungary - could also be a possibility, as a "last resort".

EU sources said that would be a complex exercise and might be premature, as the current goal is to deescalate tensions and focus on getting an agreement.

Michel said the deal on the budget-recovery package needed to be implement it as soon as possible.

"We will continue the discussions to find an acceptable solution to all," he told reporters.