EU Commission mulls ways round Hungary-Poland block

The official said the alternative would be based on EU law, and "effectively would replicate the original package".

"We are confident a solution can be found," the official said, adding that with the fallback option, money from the recovery fund could start flowing in June, as originally planned.

The official did not go into details how the "community based" option would work but said it would be "legally robust".

The commission is also preparing for the possibility of the seven-year €1.1 trillion EU budget not being in place in time, due to the blockage by Budapest and Warsaw.

The EU treaty sets out a provisional budget in such case, which has only been used once before, in 1988.

That would be in place until the commission puts forward a new draft budget for 2021 based on the budgetary ceilings of the current seven-year budget.

The official warned, however, that crucial policies, such as the cohesion policy, the Just Transition Fund helping green the economy, and the Horizon research program, would not be able to go forward without a new legal basis.

Payments would continue for contracts already signed under those programs, but no new commitment could be made. Rebates, compensation to net contributors to the EU budget would also not be paid.

The only "automatic" payments would be the agricultural direct subsidies, foreign and defence spending, and administrative costs.

The commission's willingness to draw up such plans highlights the high stakes stand-off between Hungary and Poland and the rest of the EU, ahead of a summit of EU leaders next week in Brussels.

Warsaw and Budapest have so far showed no sign of willingness to walk back on their resistance to a new mechanism - agreed by 25 member states and the European Parliament - on linking EU funds to the respect for the rule of law.

Poland and Hungary are already under EU scrutiny for breaching EU rules and values.

On Tuesday, German chancellor Angela Merkel - whose country holds the EU's rotating residency - said it called for compromise from both sides.

"The rule of law is the basis for the European project," she said, rebuffing claims by Poland and Hungary that the rule of law conditionality was introduced through the backdoor.

On Wednesday, Portuguese prime minister Antonio Costa - whose country will take over the presidency in January - warned that the EU's economy would be paralysed if neither the bloc's budget nor recovery fund are approved this month.

"Next week we really have to have this agreement," Costa said ahead the EU summit.