European Union leaders have clashed over how to rescue their economies from an economic slump caused by the coronavirus pandemic and forecast to be unparalleled since the 1930s Great Depression. Meeting via video-conference summit, as the confirmed Covid-19 death toll passed 108,000 lives across the European Economic Area and UK, the 27 leaders instructed the head of the EU executive, Ursula von der Leyen, to draft a recovery plan. Italian prime minister Giuseppe Conte told the group that the health emergency had become an economic and social emergency, “but now we are facing a political emergency as well”. Italy swung behind Spain’s €1.5tn plan for grants for the hardest-hit countries, funded by “perpetual” (non-maturing) bonds. French president Emmanuel Macron also threw his weight behind the idea, saying: “Europe has no future if we cannot find a response to this exceptional shock.” He said the scale of the crisis demanded financial transfers to the hardest-hit states, and not just loans. But Germany, Sweden, the Netherlands and other northern countries are wary of financial transfers, preferring loans. The divide between grants and loans has superseded the previous EU split between countries seeking jointly issued EU debt and those opposed – a divide that also loosely fell on north-south lines. The European council president, Charles Michel, who chaired the meeting, did not ask EU leaders to sign off a formal summit text, to avoid hours of rows over a single line in a document as happened at the previous EU virtual summit. Von der Leyen said that “arguments have been exchanged tonight but in a very constructive manner”. She noted: “There will certainly be a sound balance between grants and loans, and this is a matter of negotiation within the group of member states” and added that both had pros and cons. The commission president also warned that the “health situation is not yet fully under control and many member states have not yet reached the peak”. Her economic rescue plan is likely to draw on a €2 trillion proposal drafted by her officials that includes a potential €323bn recovery fund, raising funds on capital markets, and agreeing the tortured question of the EU’s next seven-year budget. German chancellor Angela Merkel said a recovery fund was in Germany’s interest, and that her country would have to make higher contributions to the EU budget. “In the spirit of solidarity, we should be prepared to make completely different, that is to say significantly higher, contributions to the European budget over a set period,” Merkel told the Bundestag before the summit. Joining the leaders on the call was Christine Lagarde, the head of the European Central Bank, who warned leaders of the risks of doing too little too late as she forecast that eurozone output could drop by 15% in 2020 in the worst-case scenario. As expected, the leaders endorsed a €540bn rescue package drafted by their finance ministers earlier this month. Part of that agreement gives countries the right to borrow from the eurozone bailout fund, the European Stability Mechanism. But Italy, the country hardest hit by the pandemic, is reluctant to turn to the fund, which critics say stigmatises the borrower, and Spain has said it does not need to. Along with other southern European nations, they are seeking transfers to rescue their economies. The debate on “perpetual” debt issued by the EU institutions is likely to be fraught, especially when allied to the search for compromise on the EU budget for 2021-27, which is already behind schedule after leaders failed to reach an agreement in February. The commission is now urging EU leaders to agree the budget by June 2020. “[The word] ‘perpetual’ when it comes together with ‘debt’, that is difficult to swallow for some of our member states,” said a senior EU official ahead of the summit. “The difficulty here is that every leader also has a domestic public opinion, which means public opinion and also a parliament. These leaders are ready to go to some efforts, but they have to face their own domestic problems.” Senior politicians fear the EU’s unity could fracture if the divide widens between the strongest economies and the weaker ones which have struggled to emerge from the financial crisis. “The crisis risks damaging permanently the growth potential of member states, which already face bottlenecks to growth,” an internal commission paper, seen by the Guardian, states. Germany, which takes over the EU rotating presidency from July, is backing calls for any recovery plan to be integrated into the next EU budget. In a less contentious moment, EU leaders approved guidance from Brussels on lifting the lockdown. The commission, urging caution, has set out three criteria for judging how and when to end restrictions: stable and significant decline in the spread of the disease; health system capacity; and availability of widespread testing and tracing systems to monitor future outbreaks.