BRUSSELS (Reuters) - Squabbling European Union states are moving closer to agreeing to use their joint long-term budget to restart economic growth hit by the coronavirus pandemic but the bloc’s summit on Thursday will defer any final decision on contentious details.

FILE PHOTO: European Union flags fly outside the European Commission headquarters in Brussels, Belgium, February 19, 2020. REUTERS/Yves Herman/File Photo

Charles Michel, the chairman of the 27 national EU leaders, said in an invitation letter late on Tuesday that a Recovery Fund should be set up against the bloc’s next budget for 2021-27 “as soon as possible”.

“I propose that we task the (EU executive) Commission to analyse the exact needs and come up with a proposal,” Michel said.

The European Commission, estimating that the outbreak may wipe as much as a tenth off the bloc’s economic output, is trying to broker a recovery programme that could be worth as much as 1.5 trillion euros ($1.6 trillion).

Following the summit, which will take place via videolink from 1300 GMT, the Commission will present an updated draft of the budget on April 29, including the Recovery Fund that could raise cash against guarantees from member states.

It would have to be approved by all 27 national capitals to take effect from next year, a tall order for the bloc at a time when coronavirus is bitterly testing its unity.

The EU’s fiscally conservative northern nations remain keen to keep a tight rein on spending and have repeatedly rejected calls from the ailing southern states for a joint debt - sometimes known as “coronabonds” - to fund the recovery.

“It’s a new episode of the same old fight – two camps pulling separate ways on sharing the financial burden in the EU,” one EU official said.

Seeking a compromise, the Commission wants to finance the recovery through the joint coffers and it could seek a temporary increase for 2021-22 of guarantees by member states for the budget’s resources, giving it leeway to raise more cash against that, according to sources.

German Chancellor Angela Merkel on Monday signalled readiness to help jump-start economic growth through a bigger EU budget and the issuance of joint debt via the Commission.

But major hurdles remain.

Austria, Denmark, the Netherlands and Sweden - like Germany part of the “frugal” camp - voiced reservations at a Monday meeting of national EU envoys, according to diplomatic sources and officials.

They warned against debt mutualisation, demanding a clear time limit on any emergency scheme, which they said could take a year to put in place and could only work as loans that individual countries would repay.

NO ‘SUGAR DADDY’

The Dutch ambassador told his counterparts that what some have dubbed a new Marshall Plan - a reference to the U.S. rescue package for Europe after the Second World War - should not become a “sugar daddy” policy, the sources said.

There are also huge variances on how big the recovery package will need to be.

Internal Markets Commissioner Thierry Breton has said he was working on a figure of around 1.6 trillion euros. Spain has called for a fund worth 1.5 trillion euros, which is around three times the head of the euro zone’s bailout fund’s estimate.

Since the epidemic began, EU states have already clashed repeatedly over their response, from fighting over medical equipment to disagreeing over ways of cushioning the immediate economic hit.

The bloc has relaxed state aid rules and limits on public spending to help countries carry their economies through the slump, as well as unlocking half-a-trillion euros of an immediate rescue plan, albeit after weeks of rancorous feuding.

EU leaders are due on Thursday to rubber-stamp that package - which includes a scheme to subsidise wages, more lending to companies through the European Investment Bank and cheap credit lines from the euro zone’s bailout fund. Michel said it should take effect from June.

But Rome, Madrid, Paris, Lisbon and others believe that is not enough and call for more solidarity, casting the challenge as an existential issue that could make or break the EU.

Including the 500 billion already pledged by euro zone states, the European Central Bank has called for an overall fiscal boost worth between 1 and 1.5 trillion euros.

With Italian bond yields up again on Tuesday, bond markets have been testing the ECB’s resolve to contain a rise in Rome’s borrowing costs amid dithering by EU politicians.

($1 = 0.9234 euros)