A European body called on Wednesday for the suspension of aid money to Palestinian civil servants in the Gaza Strip, recommending the funds be reallocated to the West Bank as part of a comprehensive overhaul of EU funding to the Palestinian Authority.

While denying earlier media leaks saying €2 billion in European aid to the Palestinian Authority has been squandered through corruption, the European Court of Auditors called the current funding of some 70,000 PA civil servants, including a majority who remain on EU payrolls without working, “unsustainable.” The group is an official institution within the EU.

“Although some important results have been achieved, there is a need for major revisions, such as encouraging the PA to undertake more reforms, notably in relation to its civil service,” Hans Gustaf Wessberg, head of the auditors’ team, said at a press conference in Brussels.

The EU funneled some €1 billion to the PA between 2008 and 2012 as part of scheme called Pegase — money earmarked for institution building as well as employee and pensioner salaries, and accounting for 20 percent of the total PA salary expenditure.

The EU has invested a total of €5.6 billion in the PA since its establishment in 1994 with the stated objective of “helping bring about a two-state solution to end the Israeli-Palestinian conflict.”

But since Hamas’s violent takeover of the Gaza Strip in 2007, thousands of PA civil servants have been put out of work, replaced by Hamas cronies. Nevertheless, the salaries of the PA employees have been paid by the EU continuously. On Wednesday, the Court of Auditors said that must stop.

“When people who do not work are being paid, this goes against the agreement with Pegase,” Wessberg said. “The resources spent there [in Gaza] are better spent elsewhere,” he added, saying that all EU funds should be allocated to the West Bank.

Wessberg could not say how many unemployed civil servants are currently receiving salaries from the EU nor how much money is being spent on them. He noted, however, that a random spot-check carried out by his team in Gaza in October 2012 found that four out of 10 employees questioned were out of work. A similar examination by PA auditors revealed that out of 125 salaried individuals, 90 were not actually working.

While European funds were effectively and transparently reaching their destination, the EU Commission and External Action Service have failed to create a mechanism of checks and balances to ensure the efficacy of money invested in firms and individuals, the auditors said. No system of accountability existed to examine the performance of recipients or leverage the aid to pressure the PA into executing badly-needed reforms.

“Pegase direct financial support is provided to the PA without conditionality. The only basic requirement for the distribution of funds is that the individual beneficiaries meet the eligibility criteria set by the EU,” the report read.

One example cited in the report is a value-added tax refund of nearly €2.6 million given by the EU to a luxury hotel built in Gaza, above and beyond the average support for private Palestinian companies supporting public services.

“At the time of the audit visit in October 2012 the hotel was barely operating,” the report read.

Israel, too, was held accountable by the ECA report for undermining the financial sustainability of the Palestinian Authority and contributing to its significant fiscal deterioration in 2012.

“Both the financial sustainability of the PA and the economic development of the Occupied Palestinian Territories, which is essential for financial sustainability continue to be fundamentally undermined by a series of constraints imposed by the Government of Israel,” the report read.

Laila Sbeih, the Palestinian finance ministry official tasked with coordination with the EU, would not comment on the ECA report as she was not permitted to speak to the media. The office of PA government spokesman Ihab Bseiso would say only that the report did not represent official EU policy, and that there was “no logic” in commenting on it as long as it remained a mere recommendation.

Last week, the head of the EU delegation to the Palestinian Authority, John Gatt-Rutter, said that Europe would continue to pay PA salaries through 2014.

“Today’s contribution to salaries and pensions is further evidence of our unimpeded support for the Palestinian people which will continue in 2014,” he said in a statement upon the transfer of €10 million for November’s salaries and pensions.