Europe Warns Hungary It Risks Losing Funding Amid Values Clash

(Bloomberg) -- The European Union is stepping up its fight against countries that don't adhere to democratic standards, warning Hungary that it could start a process in the fall to withhold funding from the bloc's budget.

“Measures must be taken if it's established that breaches of the rule of law in member states affect or seriously risk affecting the sound financial management of the Union budget or the financial interests of the European Union,” European Commission President Ursula von der Leyen told lawmakers Wednesday in Strasbourg.

While she didn't cite the specific grounds for holding back financing, she blasted a law Hungary passed last month outlawing content for minors that can be deemed to “promote homosexuality,” saying it flies in the face of EU values.

The commission said in a letter to Budapest last month that it's taking legal steps against the bill because it discriminates against people based on their sexual orientation.

The commission was separately endowed with a new power this year allowing it to withhold disbursements from its 1.2 trillion-euro ($1.4 trillion) joint budget over rule-of-law violations, though officials have cast doubt on whether it could be applied in response to the latest Hungarian legislation.

Von der Leyen said her team is “examining all the facts which could be relevant for later proceedings” and will “start the first files in autumn.” Hungary has clashed for years with Brussels over everything from media freedom to the judiciary.

At stake is ensuring the trust of businesses and investors, according to von der Leyen, who said tools at the EU's disposal include the so-called Article 7 procedure that could lead to the suspension of voting rights.

Charles Michel, who chairs EU summits, told the parliament earlier that EU law “has primacy” in the bloc. “We have the tools and institutions to uphold our principles and our laws,” he said. “The rule of law will run its course.”

Lawmakers urged von der Leyen to punish Hungary and called on the commission to delay approval of the country's recovery plan, which the bloc must assess by July 12. Orban's government stands to miss out on as much as 7.2 billion euros of grants from the stimulus package.

Economy Commissioner Paolo Gentiloni stressed the need for appropriate milestones in Hungary's stimulus plan. The commission is assessing “the control and audit mechanism, the non-discrimination and equal treatment between beneficiaries” of the EU funds and “the challenges to the rule of law,” he told reporters.

“You really need to touch those who are trying to abuse of our good faith and you need to hit them where it hurts, in other words, their wallet,” said Philippe Lamberts, president of the Greens in parliament. “There are states that are in breach of our rules. They need to feel the impact, in particular the financial impact.”

Hungary's legislation is part of new regulation targeting pedophilia that critics say equates homosexuals with child abusers. It drew an angry response from most EU states, with Dutch Prime Minister Mark Rutte telling Hungarian Prime Minister Viktor Orban he could leave the EU during a heated confrontation at a meeting of the bloc's leaders last month.

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