European heads of state and government spoke for around three hours during their Thursday evening video conference, a pragmatic discussion focused primarily on the coronavirus. They talked about mutual recognition of test results, about preparations for a possible third wave, about vaccine distribution and about data collection on cross-border flights.

One issue, though, was not on the agenda, even though it is casting a pall over all of Europe at the moment: The refusal by Hungary and Poland to authorize the EU's Multiannual Financial Framework (MFF) – the bloc's budget for the next seven years. And the divide in the EU that has been deepened by this veto.

With Germany currently holding the rotating Council of the EU presidency, Chancellor Angela Merkel briefly addressed the conflict at the beginning of the video conference. But the budget discussion lasted only about a quarter of an hour before European Council President Charles Michel shifted the focus of the talks to COVID-19 – in part, no doubt, because a solution to the budget conflict is as far away as ever.

"We have a duty to try to find a way forward," the chancellor said afterward. "But it's not one of the easier problems that we have to solve." European Commission President Ursula von der Leyen, meanwhile, pushed for a rapid solution. "Millions of companies and people are waiting for our response in this unprecedented crisis."

Brussels is no stranger to serious conflict, whether its about money, the fair distribution of refugees or the degree to which the EU can intervene in member-state affairs on issues like climate change. But there is a lot at stake in the current crisis, far more than just the budget plan for the next seven years. It's also about the bloc's response to the corona crisis and assistance for those in need. And it's about the EU's core values. The MFF, after all, includes a clause linking EU funds to adherence to the rule of law. And that link is the source of the current feud.

This most recent EU crisis got its start last Monday with deafening silence. The EU ambassadors from the 27 member states had gathered in Room EB S7 on the seventh floor of the Europa building to discuss an historic package: the MFF for the next seven years and the coronavirus recovery fund, worth a total of 1.8 trillion euros. EU leaders had spent four days and nights in July hammering out the compromise, followed by weeks of negotiations with the European Parliament. Now, it was time for the ambassadors to approve the package. But the representatives from Hungary and Poland weren't having it.

Icy Silence

Their veto was aimed squarely at the clause allowing for funding to be cut in cases where rule-of-law principles are violated. The ambassadors had pushed through the mechanism at the beginning of the meeting, simply outvoting Hungary and Poland. But when it comes to larger funding issues, such as the EFF and the corona relief package, approval must be unanimous – making it easy for Hungary and Poland to get their revenge.

Meeting participants later reported that the other ambassadors responded with icy silence. The German representative, Michael Clauss, who was chairing the discussion, then introduced the next item on the agenda.

The move by Warsaw and Budapest was hardly surprising. The two governments have been fighting a long battle against the so-called rule of law mechanism, despite already having been successful in watering it down. According to the current draft, funding cuts are only possible if a qualified majority of 15 member states representing 65 percent of the EU population approves them – a hurdle, diplomats believe, that would not be easy to clear.

But that's not enough for Hungary's right-wing populist prime minister, Viktor Orbán, and Polish string puller Jarosław Kaczyński. They want to defang the rule of law mechanism entirely by giving every single member state veto power. Many in Brussels had long thought the threats coming from Hungary and Poland to block the budget were just a bluff. Now, though, the realization has set in that both sides may have been betting a bit too high.

Rule of law defenders are hoping that it will be possible to convince Poland, which is seen as the slightly more conciliatory of the two countries, to disassociate itself from Hungary – at which point massive pressure can be exerted on Orbán to come around. Many, though, think the chances of that happening are rather small.

Unwillingness to Compromise

An idea being kicked around the office of Council President Michel envisions the resolution being supplemented by an official declaration in which the precise steps for funding cuts are laid out. "That would enable Orbán and Kaczyński to present something in writing, without the rule of law mechanism itself being changed," says European law expert Alexander Thiele, from the University of Göttingen.

Such a declaration, though, would not be legally binding, thus lending it more of a symbolic character. It's not likely, says a high-ranking EU diplomat, that Orbán and Kaczyński would go for such a measure.

Even less probable is that the other member states will back down. An "overwhelming majority" continues to support the compromise that was reached on the budget and the rule of law mechanism, says Michael Roth, Germany's minister of state for Europe, following a conference call with his EU counterparts.

Even in Vienna, which often has an open ear for concerns from Eastern European member states, there isn't much sympathy for the position taken by Warsaw and Budapest. Austrian Foreign Minister Alexander Schallenberg told DER SPIEGEL that the veto is "incomprehensible" from his point of view. "Particularly now, in the shadow of the pandemic, it isn't the time for blockades and the insistence on national sensitivities." Adherence to the rule of law, he says, "is non-negotiable."

The message from Paris is a similar one. "France will neither back down on the European recovery plan nor will it sacrifice its own values or accept infringements to the rule of law," says Clément Beaune, France's powerful minister of state for European Affairs at the Foreign Ministry. "Europe cannot be taken hostage."

Still, it was Netherlands Prime Minister Mark Rutte who found perhaps the clearest words. For him, he told Dutch parliament on Tuesday, the rule of law mechanism as it now stands is "the bare minimum" and a new compromise is "impossible from the perspective of the Netherlands." It was essentially a threat of a Dutch veto should there be a movement toward acquiescing to Orbán's demands. Denmark, Sweden and Finland – widely considered to be part of the "frugal five" along with Austria and the Netherlands – are also opposed to a further weakening of the rule of law mechanism, say sources in Brussels.

Ramping Up the Pressure

At the European Parliament, which must approve the budget package, the mood is pretty clear as well. "There is no way that the European Parliament will budge," says Katarina Barley, an MEP from the German Social Democrats and a former German justice minister. Even Orbán's own group in European Parliament, the European People's Party (EPP), has had enough. "We finally have a rule of law mechanism with teeth and we're not going to surrender it," says EPP floor leader Manfred Weber.

Political leaders in Germany are also supportive of that position. "The EU should make clear that it cannot be blackmailed," says Rolf Mützenich, floor leader for the Social Democrats in the German parliament. "I can imagine a compromise, but we owe it to the opposition and civil society in Hungary and Poland to insist that both countries adhere to rule of law principles."

The pressure on Poland and Hungary will increase, says Roderich Kiesewetter, a foreign policy expert for Merkel's Christian Democratic Union (CDU). Both countries, he notes, depend on funding from Brussels, adding that Poland has received three times as much funding from the EU since its accession than it has paid into the budget. Kiesewetter urges calm.

He has a point. Countries like Hungary and Poland would be among the primary losers were the budget and the recovery fund to be blocked, at least in the long term. Germany, on the other hand, doesn't have much to worry about. Berlin, to be sure, is entitled to received 22.7 billion euros from the coronavirus fund in the first three years, but in contrast to many other EU member states, Germany isn't dependent on that money, since funding for Germany's own economic stimulus package has already been secured.

Still, schools would likely suffer from the veto. The German government wants to use 500 million euros from the EU aid package to install a "school cloud" distance learning platform along with a program to equip schoolteachers with tablets or computers. The rest of the money is earmarked for projects that have already been approved as part of the German government's 130-billion-euro stimulus package.

However, Poland and Hungary aren't just putting the brakes on the recovery package, but also on the normal budget. If it can't be passed by the end of the year, an emergency regime would kick in, under which only agricultural subsidies would continue to be paid in full. All other payments, such as research funding and structural payments, would be reduced. But even this situation would have advantages for Germany, which is a net contributor to the MFF. For as long as the emergency budget is in place, Berlin would owe less.

With Germany still holding the rotating Council of the EU presidency until the end of the year, all eyes are on Merkel to point the way out of the muddle. Thus far, however, no proposals for solving the deadlock have been presented.

On the contrary, there is a real danger the conflict could escalate further. If Hungary and Poland refuse to back down, a "nuclear option" could be considered, says Netherlands Prime Minister Rutte. That plan envisions the other 25 EU member states removing the coronavirus recovery plan from the budget package and reintroducing it as a multilateral deal, which would result in no money at all for Hungary or Poland. Similar ideas are circulating in Paris.

European law expert Thiele has already found a precedent for such a maneuver: The European Stability Mechanism (ESM), which was established in 2012 by Eurozone member states as a facility governed by international law. "The 25 EU member states could set up the recovery fund in accordance with this model, and even integrate the European Commission," Thiele says.

"Veto or Death"

There is, however, a fair amount of skepticism in the Commission of such a move. "Doing such a thing is incredibly arduous," says an EU diplomat. "That wouldn't be the best instrument in this crisis."

Given the lack of good options, all eyes are currently on Hungary and Poland. Will they really risk such a collision with the EU? That could depend primarily on domestic considerations in the two countries.