Brussels has triggered a process in Hungary that threatens to link the payment of EU cash to respect for rule of law.
It comes two days after Viktor Orban, secured a fifth -- and fourth consecutive -- term as Hungary's prime minister.
Orban has clashed frequently with the European Commission over respect for key EU values, such as LGBT rights, rule of law and attacks on independent media.
Now, the European Commission has notified Budapest it is triggering the so-called "conditionality mechanism" over rule of law breaches, opening the door to financial sanctions.
"The Commission has today spoken to the Hungarian authorities that we will now send a formal letter to start the conditionality mechanism," European Commission chief Ursula von der Leyen told MEPs.
Earlier in her address, Von der Leyen had said that the European Commission required Budapest to implement reforms to tackle corruption.
However, she noted that the two sides have "not been able to find common ground".
She added that the Commission has followed the procedure as laid out by treaties by addressing a letter of formal notice and later referring the case to the European Court of Justice and that upon receiving Hungary's answers, they drew the "conclusion we have to move on to the next step".
MEPs in Strasbourg, who have long demanded the EU's executive proceed with the new mechanism, cheered the announcement with a round of applause.
Daniel Freund, an MEP for the Greens/EFA group, welcomed it by writing on Twitter: "It's happening. FINALLY!"
But German Green MEP, Rasmus Andresen, told Euronews that the rule of law mechanism should have been triggered sooner.
"One of the reasons why Orbán is as strong as he is, is because many in Brussels had not learnt lessons in
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