(Bloomberg) -- The European Commission is poised to release a critical report about the state of democracy in Hungary and Poland, adding fuel to a showdown that threatens to delay a 1.8 trillion-euro ($2.1 trillion) economic recovery package.

“Prosecution of high-level corruption” in Hungary “remains very limited and there appears to be a consistent lack of determined action to start criminal investigations and prosecute corruption cases involving high-level officials,” the European Union’s executive arm will say in its first-ever annual rule-of-law report, which assesses the bloc’s 27 member-states, according to a draft obtained by Bloomberg.

The assessment could increase pressure to tie disbursements of European Union funds with adherence to rule-of-law standards, under a proposal that Hungary and Poland currently reject.

While EU leaders had agreed in principle in July that a mechanism to protect EU funds from fraud in cases where institutions are weak should be be created, they left the details of how this mechanism would work unresolved. A German proposal was summarily turned down by Budapest and Warsaw, while richer nations such as Finland and the Netherlands argued that it doesn’t go far enough.

Blockades Increasing

“We observe with concern that the number of different blockades in the budget negotiations seems to be increasing rather than decreasing,” said a spokesman for the German presidency of the EU. “A delay of the EU budget and the recovery fund is becoming increasingly likely.”

A weighted majority of EU member states is needed for the rule-of-law mechanism to be approved. Allowing the Commission to issue 750 billion euros in debt on behalf of the bloc to fund the recovery package requires unanimity, which so far Hungary refuses to grant.

“We are dealing with a very polarized debate,” the German presidency spokesman said after a discussion of the proposal among EU diplomats on Tuesday. “There is dissatisfaction and criticism at both ends of the spectrum.”

EU government envoys will continue talks Wednesday on the German proposal, under which a weighted majority of member states would need to approve any decision to stop fund disbursements to countries over rule-of-law breaches.

Too Lenient?

Richer nations see this as too lenient, and have said they won’t agree to bankroll a joint aid pot without iron-clad guarantees that funds won’t be misappropriated.

The Commission’s report on Wednesday may exacerbate their reservations. The draft also says that:

  • “Concerns that high-level corruption cases are not pursued systematically are also present in” the Czech Republic.
  • “In Poland, the double role where the Minister of Justice is also the Prosecutor General has raised particular concerns, as it increases the vulnerability to political influence.”
  • In Hungary, “significant amounts of state advertising channeled to pro-government outlets have opened the door for the government to exert indirect political influence over the media.”

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