In a long-awaited ruling on February 16th, the Court of Justice of the EU, the highest court of the European bloc, ruled that the EU's much-debated rule-of-law conditionality mechanism (a new sanctions instrument that would link the disbursement of EU funds to upholding democracy and the rule of law) was compatible with EU law. The much-anticipated decision is a major blow to the Polish and Hungarian governments that challenged the regulation in court in 2021.

Both CEE governments have been locked in a long-running dispute with EU institutions over alleged democratic backsliding, signalling that Budapest and Warsaw, both of which are major beneficiaries of EU funding, could be the first targets of the new sanctions mechanism that could ultimately lead to the loss of funds from Brussels. This comes as Poland and Hungary are yet to secure billions of euros of post-pandemic recovery funding from Brussels to support their economic recovery in the wake of the COVID-19 crisis.

Aretera provides a brief overview of the landmark court decision, its implications for Central and Eastern European markets, as well as possible future scenarios.