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 the past and actually supported him in the past and now we really need to speed up on issues like the rule of law mechanism, but also when it comes to other sanctions we can do against Hungary and Viktor Orbán," Andresen said.
MEPs first approved the rule of law mechanism regulation in December 2020, followed by intense haggling at then European Council level, with Hungary and Poland both demanding it to be watered down and threatening to veto the bloc's budget over it.
The two countries then referred the mechanism to the ECJ, which ruled in February that EU institutions could tie funding to member states to respect for the rule of law.
On Sunday, Orban's Fidesz party secured 53% of the vote and a two-thirds "supermajority" in parliament.
Orban, who has built his career on EU-bashing, had described his victory on Sunday evening as " so big that you can see it from the moon, and you can certainly see it from Brussels."
Will Brussels take the same action against Poland?
Asked about whether the Commission will also trigger the mechanism against Poland over its clampdown on judicial independence, von der Leyen said Brussels has outlined "three reform requirements", which were also demanded from Warsaw by the ECJ.
These are the dismantling of the disciplinary chamber for judges, a reform of the disciplinary regime, and a process to "reinform the unlawfully dismissed judges".
She said Warsaw has to bring a law to parliament that will fulfil the three criteria but did not provide a deadline for the Polish government -- by which time the Commission's patience would run out and the conditionality mechanism would be triggered.
The ECJ ordered Warsaw to pay a record fine of €1 million a day in an October ruling over its refusal to suspend the controversial disciplinary chamber of judges of its Supreme Court.
Dutch MEP Sophie in 't Veld says action should be taken against Warsaw too.
"We are worried that the Commission is negotiating with the Polish government whereas the rule of law should not be negotiable. The independence of the judiciary is not negotiable," in 't Veld told Euronews.
The Commission chief was in parliament to recap her action since the beginning of her term and outline her priorities.
The EU's top diplomat Josep Borrell was meanwhile scheduled to update MEPs on the bloc's security plans and discuss the Strategic Compass approved by leaders at a summit 10 days ago.
The document aims to outline a common defence and security strategy to respond to outside threats and plans the creation of a joint rapid intervention of up to 5,000 troops.