In a speech delivered to the European Competition Forum in Brussels, Joaquín Almunia said that reform was needed to enable the Commission to concentrate its state aid investigations on "cases that have a real impact on competition in the internal market", such as selective tax advantages or public funds being used to support incumbent companies.
Modernising the Commission's current policy would enable it to take quicker decisions while supporting the efforts of individual member states to boost growth, he added.
Almunia said that he would set out his proposals for reform by the summer and that the main elements of those proposals could be in place "before the end of next year".
State aid is an advantage or incentive granted by a national government to a particular company, and can take a variety of forms including grants, tax reliefs, guarantees, government holdings of all or part of a company or the provision of goods and services on preferential terms. To ensure fair competition inside the EU, state aid is prohibited unless it can be justified on a for general economic development reasons.
Member states must apply to the Commission on a case by case basis before they can offer incentives which could be construed as state aid, and companies which have received public support illegally can be ordered to repay any incentives. Last week, Germany and Belgium were ordered to reclaim millions of euros of illegal aid granted to their national postal services.
In his speech Almunia said that where governments used public funds to favour certain companies, it harmed competitors from elsewhere in the EU, "even more so in times when a few governments can spend a lot more than many others".
"At the same time, we need to give a more systematic look at how the benefits that the aid can bring measure against its possible distortion of competition in the internal market. Government support should go where it can make a difference for EU competitiveness and where it can stimulate innovation, growth and employment," he said.
Approximately €52 billion, or 0.42% of EU GDP, was granted by member states in the form of state aid in 2010, according to Commission figures. The funds were used to support objectives including regional development, environmental protection and research and development.
As an example, Almunia said that some member states had successfully used state aid to increase the proportion of energy generated from renewable sources to well above the Commission's target of 20% by 2020. "It is this kind of aid that will help efficient companies grow stronger, inefficient ones be replaces and innovative businesses come to life. I want to encourage our member states to proceed along this road," he said.
However, he warned that state aid should only be used where it could "actually change behaviour", rather than subsidise companies for what they would do anyway.
"We can see this in the car industry, for instance, where the public purse should support research and innovation, rather than finance business as usual," he said.
Almunia said that his reform of state aid would focus on allowing the Commission to set its priorities better with "better tools to investigate cases in depth and on its own initiative".
The new system would feature a quicker process to deal with notifications and complaints on issues with little impact on competition, as well as "fewer, simpler and more targeted rules" he said.
Current state aid rules had been developed on a piecemeal basis, resulting in a complex system of "as many as 37 different guidelines", he said.
Almunia said that a reformed system of state aid would allow public authorities to redirect their money into research and development, the green economy and sustaining "the weaker sectors of our societies". Changes could also make access to finance easier for smaller businesses, he said.
"State aid control can have a positive impact on budgetary discipline and on the quality of public finance as it can help redirect spending on targeted growth-enhancing policies. A new framework to improve the coordination of budgetary and economic surveillance is being put in place and it is worth exploring how national arrangements for state aid may fit in the broader picture," he said.