Countries with excessive budget deficits face losing farm subsidies under new proposals from the European Commission.
Regulators are seeking to widen the range of penalties for spendthrift governments that endanger the euro's stability.
The European Commission said countries that fail to bring deficits back below the limit of 3 per cent of gross domestic product could be denied EU agricultural aid, forcing them to support farmers from their own budgets.
A wider array of sanctions would "strengthen the credibility of the EU's fiscal framework," the commission said in a statement today. "These should also be used preventively and would kick in at an earlier stage."
Economic and Monetary Affairs Commissioner Olli Rehn said the idea is to use the 27-country EU's budget "as additional leverage" to compel governments to comply with fiscal rules.
Agriculture is the biggest single subsidy provided by the EU, accounting for €55 billion out of a total budget of €117 billion in 2008.
The commission also proposed financial sanctions on euro- area countries that make "insufficient progress" toward budget-cutting targets. It also sought reductions in EU infrastructure subsidies for deficit violators.
Mr Rehn told reporters in Brussels he aims to make legislative proposals for the new sanctions by the end of September.
The proposals today will go further than when Mr Rehn first suggested a fundamental reform of the EU Stability and Growth Pact last month, a plan which included the submission of draft budgets to Brussels before national parliaments.
The ministers are discussing reform plans in a special group chaired by European Council president Herman Van Rompuy, who has suggested a suspension of EU cohesion funding as a way of penalising rule-breakers.
This, however, was seen to discriminate against poorer member states as they are the beneficiaries of cohesion funds and such funds do not go to large, wealthy states.
Thus Mr Rehn's plan sets out the eventual possibility of suspending some disbursements from EU funding generally, the idea being to allow for equal treatment in the punishment regime. A further measure would be for governments to be compelled to make interest-bearing deposits with the European Commission if their budget plans are deemed inadequate.
Anxiety about the strength of the banking system surfaced again yesterday as investors fretted about a potential liquidity shortfall in the financial system, as European banks repay €442 billion one-year ECB loans under an emergency liquidity scheme which expires tomorrow.
The ECB is keeping open emergency liquidity schemes for short-term money. But its decision not to extend the one-year window has angered banks in Spain, where interbank lending is frozen.
Madrid metro workers went on strike yesterday in protest at a pay cut, while police fired tear gas at protesters in Athens as minor clashes broke out at the fifth major strike this year by Greek unions.
Additional reporting by Bloomberg