By Francesco Guarascio and Philip Blenkinsop
BRUSSELS (Reuters) - The European Central Bank's chief warned on Friday that the European Union's economy was in a "dramatic fall" due to the coronavirus crisis but EU leaders made little progress towards agreeing a massive stimulus plan.
Christine Lagarde told a video-conference summit that the full effects of Europe's worst recession since World War Two had yet to appear in the labour market and unemployment in the 19-country euro zone could jump to 10% from 7.3% now.
Her stark message came as the bloc's 27 national leaders settled in at their computer screens to discuss kickstarting economic growth. While they avoided a bruising bust-up, three hours of talks left them no closer to a final deal.
"Timing is very important. We must reach a deal by the end of July," Italian Prime Minister Giuseppe Conte told the gathering, according to sources. "In this historic debate, it's Europe who should prevail."
Under discussion is the EU's 2021-27 budget of about 1.1 trillion euros, and a proposal by the European Commission to borrow 750 billion euros from the market to replenish a new recovery fund to help revive economies hardest hit by coronavirus, notably Italy and Spain.
With more than 100,000 deaths from COVID-19, the EU is keen to demonstrate solidarity after months of bickering that has dented public confidence and put the bloc's global standing at risk after its buffeting from Brexit.
Lagarde said financial markets were relatively calm because of expectations that bloc would act to show "the EU is back", according to sources briefed on the discussion.
FRUGALS VS. CLUB MED
But many divisions remain, with Austrian Chancellor Sebastian Kurz saying: "The recovery fund must not be an entry into a permanent debt union - there must therefore be a clear time limit."
"It is also necessary to discuss what the money is spent on, how it is distributed and what conditions help should be linked to," he said of a demand firmly rejected by the ailing south.
Another diplomatic source said an in-person summit of EU leaders in mid-July was tentatively scheduled to try close the gaps.
The fiscally conservative northern countries are at odds with the high-debt "Club Med" group of southerners over the size and terms of the recovery fund, which the Commission has suggested be split into two-thirds grants and one-third loans.
The Netherlands, Denmark, Sweden and Austria - the "Frugal Four" - say the fund is too large and should be used only as loans, since grants would have to be repaid by all EU taxpayers.
They want the funds to be clearly linked to pandemic recovery and say recipients must commit to economic reform.
Eastern EU countries say too much money will go to the south and want spending to focus on agriculture and closing development gaps with the richer west.
The latter group, in turn, wants to stick to its rebates on contributions to the bloc's joint coffers, which others want to phase out.