European capitals have clashed over proposals to make payments from the eus forthcoming budget conditional on respect for the rule of law, triggering concerns about possible delays to the region's 750bn recovery fund.

The german presidency of the eu on monday put forward proposals that would, under some circumstances, permit the suspension of disbursements of european taxpayer money to countries which breach principles such as judicial independence and respect for democracy.

But the new text triggered an immediate backlash among some northern european member states that have been calling for a tough rule of law conditionality to counter what they see as a dangerous slide into illiberalism in countries such as hungary and poland.

Finland, the netherlands, sweden and denmark are among the countries that think the proposed rule of law mechanism gives too much power to illiberal european governments by handing a single country a brake that would delay the suspension process, said diplomats. they also argue the german presidencys draft creates too high a legal threshold for the mechanism to be triggered when there are measures undermining the rule of law including eroding judicial independence and media freedom.

It is not what we were hoping for, said a diplomat from one of the eus frugal member states. it is a watered-down version of the compromise in july.

One of the biggest pieces of unfinished business following the july summit that agreed the recovery fund is how to settle on the new rule of law mechanism that satisfies all member states as well as the european parliament. the topic is likely to come up in a eu summit due to be held on thursday with viktor orban, the hungarian prime minister, leading the opposition to a mechanism with real teeth.

For northern european member states and many meps, a tough conditionality mechanism is essential given the huge flows of eu cash that will go to member states which have been flouting eu norms. the idea of the mechanism is to ensure that eu money does not get spent in ways that violate the blocs rule of law principles.

This weeks eu summit will provide an opportunity for leaders to thrash out their differences, but as things stand a deal seems a long way off. hungary and poland have already vowed to veto the entire recovery package over the terms of the mechanism.

Last week several member states including the netherlands warned they were not prepared to push ratification of the recovery fund through their national parliaments until a deal is struck between the eu council and legislature. one eu diplomat accused the dutch of trying to scupper the entire recovery plan for reasons of domestic politics.

It is a transparent attempt to delay or block an unloved recovery fund for domestic reasons, the diplomat said.

The divisions between eu governments will have to be resolved before the council can advance negotiations with the european parliament which is also insisting on a rule of law tool that punishes strongmen governments in hungary and poland.

Daniel freund, a green mep, said the german draft was a stunning watering down of the july agreement between eu leaders. 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.

However an official close to the file defended the proposals, saying they very precisely implemented the conclusions of the eus july summit, when leaders agreed on the new recovery fund and eu budget.

The draft gives a legal form to this hard-won and delicate european compromise, said the official. 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.