Warning of slump ahead, Lagarde urges EU to agree recovery deal

The European Central Bank's chief warned EU leaders on Friday that their economies were heading for a "dramatic fall" due to the coronavirus crisis and urged them to agree quickly on a massive stimulus plan that has divided the bloc.

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 percent from 7.3 percent now.

Her stark message came as the European Union's 27 leaders settled in at their computer screens for a day of discussions on recovery for their bloc.

With more than 100,000 deaths from Covid-19, the EU now needs to demonstrate solidarity after months of bickering that has dented public confidence in the bloc and put its global standing at risk after its buffeting from Brexit.

"It's a crisis without precedent that has had an enormous impact - economic, social and also on the viability of the EU," said a senior EU diplomat. "To show that Europe protects, we cannot take any longer on this, as delays will only make things more difficult and more expensive."

Sources said Lagarde told the summit that financial markets were relatively calm because of expectations that they would act to show "the EU is back" in action.

FRUGALS VS. CLUB MED

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 help revive economies hardest hit by coronavirus, notably Italy and Spain.

Officials and diplomats said the leaders would lay out their stalls on Friday but a deal would not come before July.

The summit's chairman, European Council President Charles Michel told them: "We have a collective responsibility to deliver".

Even before the pandemic there was a stand-off between fiscally conservative northern countries and a high-debt "Club Med" group of southerners over the bloc's long-term budget.

Now, they are divided 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.

"Conditionality is a big issue. An agreement on reforms could create room for manoeuvre on grants," one diplomat said.

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 west.