BRUSSELS, July 15 (Reuters) - The European Union's top court ruled on Thursday that Poland's system for disciplining judges undercuts the bloc's laws, part of an escalating battle over democratic rules that risks Warsaw losing some of its key development funding.
Poland's ruling nationalists set up a disciplinary chamber at the Supreme Court in a sweeping overhaul of the judiciary already condemned by the Brussels-based EU executive, which acts as the guardian of laws across the bloc's 27 member states.
Reinforcing that, the Court of Justice of the EU (ECJ) ruled that the chamber "does not provide all the guarantees of impartiality and independence, and, in particular, is not protected from the direct or indirect influence of the Polish legislature and executive".
The Luxembourg-based ECJ had already told Warsaw to immediately stop all proceedings at the disciplinary chamber but Poland's top court said on Wednesday the demand ran counter to its constitution and the country should not comply.
The Polish ruling challenged the primacy of European laws over national ones, drawing warnings that the ruling Law and Justice (PiS) party is edging away from the EU, which has driven the ex-communist country's social and economic development.
"It's not Poland but Kaczynski and his party that are leaving the EU," Donald Tusk - the head of Poland's main opposition party, a former chairman of EU leaders and the arch-foe of PiS head Jaroslaw Kaczynski - said of the Polish ruling.
'POLEXIT'?
Warsaw's refusal to comply with the ECJ does not mean it must now follow in Britain's footsteps and trigger the formal EU divorce procedure. But it is undergoing a de-facto "legal Polexit of the judiciary", an EU official said, moving itself further away from the bloc.
Steve Peers, law professor at Britain's University of Essex, said talk of Poland exiting the EU was an exaggeration.
"Legally, it can't be thrown out of the EU and there seems no sign of a Polish government trying to leave," he said. "What you have is Poland continuing to be part of the system but at an increasing level of conflict about what that means and how it fits into the system."
The row may lead to the ECJ imposing hefty fines on Warsaw or the other EU countries suspending financing. Poland is due to get some 770 billion zlotys ($200 bln) from the bloc by 2028; its nominal GDP was 2.3 trillion zlotys ($595 bln) in 2020.
Some procedural steps would be needed before the ECJ could impose any fines. The EU's new mechanism to protect the rule of law by cutting financing for countries violating it has not yet been tested and is politically sensitive. That means Warsaw still has time and scope to negotiate should it be willing to avoid punishment.
Poland has been a top beneficiary of EU development aid since first joining the EU in 2004 and while not even the eurosceptic government may be willing to risk that, Poland's rights ombudsman - and a vocal PiS critic - warned no one could be sure where such a crawling "legal Polexit" leads.
Once seen as a posterchild of post-communist transition, Poland has become an enfant terrible of the EU under the PiS, which has also clashed with the bloc over independence of media and curbing the rights of migrants, women and gays.
Separately on Thursday, the bloc's executive European Commission started new legal cases against Warsaw and Budapest for violating LGBT rights.
The executive took Poland to task over some areas in the country that declared themselves "LGBT-free zones". Hungary touched a raw nerve in the bloc with a new law that bans from schools materials deemed as promoting homosexuality.
