The two countries wanted the ECJ to invalidate the so-called “conditionality mechanism” that can trigger a restriction of funding, claiming that it was incompatible with the EU’s treaties.

But the court did not agree with that view, arguing that the conditionality mechanism: 
was adopted on an appropriate legal basis, is compatible with the procedure laid down in Article 7 TEU [Treaty on European Union] and respects in particular the limits of the powers conferred on the European Union and the principle of legal certainty

The verdict was broadcast live, which is not common for the court, and an indication of the high public interest in the Hungarian and Polish case.

The ECJ found that there was a sufficient legal basis for regulation in EU law, contrary to the view taken by Hungary and Poland. As the Court explained:

the procedure laid down by the regulation can be initiated only where there are reasonable grounds for considering not only that there have been breaches of the principles of the rule of law in a Member State, but, in particular, that those breaches affect or seriously risk affecting the sound financial management of the Union budget or the protection of the financial interests of the Union in a sufficiently direct way.

In brief, Member States that flout democratic standards can be punished under the regulation.

The ruling was not a surprise to the Hungarian government, which has been building its own narrative that the rule of law legislation is just another cudgel that the EU is using against Hungary. Viktor Orbán has outright used the term rule of law “jihad,” and it is likely not a coincidence that his party Fidesz is holding a closed-door meeting in Balatonfüred today, when the ECJ announced its judgment.

Adopted in December 2020, the disputed regulation allows for the European Commission to apply the conditionality mechanism to member countries where democratic backsliding has caused harm to the joint EU budget, allowing the Commission to cut or hold back funds to those countries.

The Hungarian and Polish governments opposed the legislation from the start, but in the end did not veto a compromise solution.