Germany put forward proposals that would allow for funds to be suspended to countries which are deemed in breach of the bloc’s rule of law. The mechanism would allow northern states to challenge taxpayer-funded handouts sent to Hungary and Poland if the countries are deemed to disregard EU principles on judicial independence and respect for democracy. Finland, Sweden, Denmark and the Netherlands accused Berlin of presenting watered down plans that hand too much power to rule-breaking European governments.

Diplomats said the German presidency of the EU had given too much power to states to delay the suspension process.

They added the legal threshold to trigger the mechanism is too high and won’t stop countries from a crackdown on media freedom or judicial independence.

A sceptical diplomat said: “It is not what we were hoping for.”

“It is a watered-down version of the compromise in July,” they told the FT.

Earlier this summer EU leaders agreed on the £670billion (€750billion) coronavirus recovery fund for hard-hit regions and industries during an acrimonious summit in Brussels.

Under the proposals, the bloc will jointly borrow the cash on international markets before handing it out in the form of non-repayable grants and low cost loans.

During the talks, which lasted almost 100 hours, leaders battled over a rule of law mechanism to enforce conditionality to prevent funds from flowing to EU rule-breakers.

But Hungarian prime minister Viktor Orban threatened to veto the whole package, including the bloc’s next seven-year budget of €1.1 trillion, unless the tool was scrapped or amended.

EU leaders are set for another showdown when they attempt to thrash our their difference a Brussels summit later this week.

The talks have been plagued by threats of vetoes from the likes of Poland, Hungary and even the Netherlands.

Last week the Dutch warned they would not start the ratification process of the recovery fund through their national parliament until a deal is struck.

One EU diplomat accused the Dutch of attempting to crash the entire recovery fund for reasons of domestic politics.

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He said: “The tool is entirely in the hands of Viktor Orban. It also means that a country can replace all its judges and the Commission would need to prove how that affects the finances of the Union.”

But an official close to the negotiations said the proposals “very precisely” carried out what was decided at the EU leaders summit in July.

The official said: “The draft gives a legal form to this hard-won and delicate European compromise.

“For the first time in the history of the EU, there will be a mechanism that links the handling of European budget funds to the rule of law. This is an important step forward.”