EU leaders to reconvene in July on budget and recovery

While leaders agreed that the commission's borrowing could go ahead, they disagreed on the size of the recovery package.

The 27 also disagreed whether it should be distributed to member states through grants or loans, on what criteria, and what sort of further revenue and taxes the EU itself can have.

Countries also disagreed on rebates - a compensation for some countries which pay into the EU budget more than they get out. Most member states are arguing for its phase-out, but the loose alliance of the 'Frugal Four', most notably the Netherlands, insist on it.

Most EU countries and senior EU officials emphasised the need to come to an agreement fast, as a stimulus is urgently needed as Europe faces its worst economic crisis in decades due to the coronavirus pandemic.

EU Council president Charles Michel, who will put forward a compromise proposal before the July summit, said after the four-hour online meeting that leaders need to "take a decision as soon as possible".

EU Commission president Ursula von der Leyen echoed that, telling reporters that "many leaders stressed" the need to decide before the summer break.

EU officials and diplomats had already talked up the possibility of a second summit in July to make sure a deal is reached, and the prime ministers of Span and Italy also called for a speedy agreement.

However, Dutch prime minister Mark Rutte poured cold water on these heightened expectations, saying he was not sure there could be an agreement in the summer, or if there is a need to hurry.

"We continue to stand fairly far from each other," said Swedish PM Stefan Lofven, who also belongs to the so-called frugal group.

"There is an emerging consensus, but we don't underestimate the difficulties," Michel acknowledged after the meeting.

Clearer link

Before leaders moved into their discussion, European Central Bank president Christine Lagarde warned them that Europe's economy was in a "dramatic fall".

Lagarde said she expects a quarter-on-quarter decline of 13 percent in the second quarter for the eurozone and a contraction of 8.7 percent in 2020 overall.

The worst impact on the labour market is still to come and unemployment could end up at 10 percent - which would particularly hit young Europeans hard.

However, some member states led by the 'frugals', want to make sure that the recovery package is only used to offset the affects of the corona crisis, and not to aid countries where economic reforms had been lagging for years.

"[For] some member states it is important to have a clearer link between the data related to the recovery fund, and the distribution of fund, and the Covid-19, this is one of the issues we have to tackle," Michel confirmed.

The frugal countries, which are also net contributors into the EU budget, wants stricter conditions to access the recovery money, and a clearer link to the corona crisis when calculating the distribution of the fund.

"This package is not intended to save individual member states or to address the past difficulties of individual member states. There will certainly be a debate in the future on the debt sustainability of the member states and how to be better prepared for such crises and shocks, but this is the place for another debate," Finnish prime minister Sanna Marin, who is supporting the frugal position, said.

Some eastern European governments, worried that the new criteria would divert funds to southern countries, would also like to see a more direct link to the current crisis.

Von der Leyen argued that it is difficult to separate the Covid-19-related shock and the vulnerability of certain economies.

"The negative effect of the crisis was prominent in member states that were not resilient enough in their overall structure to absorb the overall shock of the crisis, she said.