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The two countries have followed through on their threat to block spending plans through to 2027. The EU needs a unanimous vote from all 27 members in order to pass the budget and coronavirus economic recovery fund.
Hungary and Poland blocked approval of the EU's long-term budget on Monday, diplomatic sources revealed. The spending plans also include a €750-billion ($888 billion) coronavirus rescue package.
The two countries are opposed to a rule-of-law mechanism that could see them lose EU subsidies if they continue with policies seen as eroding democratic standards.
"Hungary has vetoed the budget," Zoltan Kovacs, a spokesman for Prime Minister Viktor Orban said, arguing that the package must reflect a deal reached in July.
"We cannot support the plan in its present form to tie rule of law criteria to budget decisions," he said.
The veto is likely to delay the delivery of much-needed cash for the EU, with the seven-year budget set to begin January 1.
Poland's Prime Minister Mateusz Morawiecki threatened a veto last week.
"The question is whether Poland... will be subject to political and institutionalized enslavement," Zbigniew Ziobro, Poland's justice minister, said Monday.
"Because this is not rule of law, which is just a pretext, but it is really an institutional, political enslavement, a radical limitation of sovereignty," he asserted.
Donald Tusk, head of the European People's Party (EPP) and former Polish prime minister, denounced the move to block approval of the EU's budget plan, and called for Hungarian Prime Minister Viktor Orban to be expelled from the EPP.
"Whoever is against the principle of the rule of law is against Europe. I expect a clear position on this from all the EPP parties. The opponents of our fundamental values should no longer be protected by anyone," Tusk tweeted.
EU leaders thought they had resolved dispute over the budget and associated stimulus plan at a four-day summit in July.
Senior European diplomats said it was unlikely that other countries would agree to compromise on the rule of law condition.
"We'll see if Budapest and Warsaw are looking for guarantees and if these are acceptable," AFP news agency quoted an unnamed diplomat as saying, who warned of a "serious political crisis."
EU leaders were due to hold a video conference on Thursday to discuss the coronavirus crisis. They may now be focusing on convincing Poland and Hungary to resolve the budget stand-off.
Spain hopes the 27-member bloc will resolve the dispute in coming days.
"It is urgent that the budget agreement and the various normative documents are approved," Economy Minister Nadia Calvino said on Monday, underlining that Spain supported the key condition of the rule of law.