10/06/2011 05:38 EDT | Updated 12/06/2011 05:12 EST

EU Commission: unsound use of funds and subsidy tap could be closed

BRUSSELS - The European Commission wants to be able to suspend parts of the next multibillion euro (dollar) funding program for poorer regions if too much money is lost through bad economic policy or insufficient oversight.

In a carrot-and-stick approach, the European Union's executive announced Thursday that its proposals to spend €336 billion ($448 billion) over seven years also will include financial rewards for projects that fulfil their commitments.

"If member states fail to react then we've got to have a last resort" and suspend payment, said EU Commissioner Johannes Hahn. With tougher spending checks and enforcement, "the clear aim is to get more out of our investment than we put in."

The proposals will now be taken up by the 27 member states, and the new multibillion euro (dollar) program should kick in by 2014.

The so-called "cohesion funds" have been used to bridge the wealth divide between countries like Germany and Denmark on the one hand and Greece and Romania on the other. In the past, it has allowed member states like Portugal to make vast progress with public works like highways and to back industries.

At the same time, though, the program has also been mired in scandal because of inefficient spending and local corruption. Amid the financial crisis and crippling debt, there has been an increasing focus on frugality among EU states. And after countries like Greece, Ireland and Portugal needed bailouts to stave off default there have been complaints that the aid should have been more closely linked to performance.

Germany was among those demanding more fiscal rigour in the spending of EU funds.

The Commission said that over the past 10 years such programs have created one million jobs and helped set up at least 800,000 small and medium enterprises.

Now the Commission wants to turn those vast handouts more directly toward competitiveness.

"Given the economic crisis, it must now become a motor for growth," an EU statement said. Hahn added there would be more emphasis on loans rather than grants. Under the new 2014-2020 program just over two-thirds of the programs will go to less developed EU regions.