Budget, EU – Baltic States, Financial Services, Legislation, Markets and Companies

Europe's 1.8-trillion-euro (USD 2.1-trillion) budget and coronavirus recovery package had been blocked by Hungary and Poland over an attempt to link the disbursement of funds to respect for the rule of law.

The stand-off risked delaying the recovery fund well into next year, just as a second wave of the coronavirus pandemic was punishing the European economy, but on Thursday the leaders came to a compromise that allowed the package to go through.

"Today's agreement shows that insight triumphs over egoism. With this financial package, Europe can emerge powerfully from the crisis," German finance minister Olaf Scholz said in a statement.

"We have defended the interests of Hungary. D-Day was a success!" Hungarian Prime Minister Viktor Orban said.

And his Polish counterpart Mateusz Morawiecki said: "We fight for our rights. We fight for clarity, we fight for certainty of law, and we fight for the EU treaty so that they are not circumvented by the secondary law."

Under the deal, the Polish leader explained, the rule of law mechanism would be limited to ensure that EU funds are spent correctly according to precise criteria and not touch on social issues such as abortion, LGBT rights or migration policy.

Budapest and Warsaw are major recipients of EU budget cash, and the new mechanism is seen as a way by critics to slow a steady slide into authoritarianism in those countries.

Both governments have been accused by Brussels of rolling back democratic freedoms, notably judicial independence in Poland and press and civil society freedoms in Hungary.

Germany, which holds the EU's rotating presidency, worked hard to break the logjam with a legal "declaration" that provides further clarity on how the rule-of-law mechanism would work.

With the budget row out of the way, focus could turn to Brexit, even though leaders were not expected to discuss the talks at length during the two-day summit.

London and Brussels have said they will decide by Sunday whether to press on with talks aimed at thrashing out a post-Brexit trade deal, after British Prime Minister Boris Johnson and EU chief Ursula von der Leyen failed to bridge "major differences".

The EU ratcheted up pressure by publishing its no-deal contingency plan to protect air and road travel and fishing rights just three weeks ahead of a year-end deadline, as negotiators from the two sides resumed talks in Brussels to find a way forward.

The marathon summit also decided to draw up a list of Turkish targets for sanctions over its stand-off on energy resources with EU members Greece and Cyprus in the Eastern Mediterranean.

Ankara has been challenging Athens over maritime territory in the region by repeatedly sending a gas exploration vessel into Greek waters.

France, Greece, and Cyprus are pushing for strong action against Turkey, but other EU nations including Germany, Italy and Poland oppose slapping broad sanctions or an embargo on a fellow NATO member.

"The council adopted sanctions in the face of Turkey's 'unilateral actions and provocations'," French minister for European affairs Clement Beaune tweeted.

Leaders agreed to a staggered approach, with new names of individuals and companies added to a blacklist and the threat of supplementary sanctions kept in reserve if Turkey does not change tack.

Debate over climate went into the early hours of Friday, as the 27 EU members could not strike an agreement to increase the bloc's target to slash emissions.

The hope is for a 55 percent reduction of European emissions in 2030 from 1990 levels and carbon neutrality by 2050, but some countries such as Poland disagree over how to get there.

To avoid a veto from Warsaw, the bloc could agree to a collective commitment to cut emissions that would not place the burden on individual nations.