- The coronavirus pandemic has resurfaced old divisions among the countries that make up the EU.
- Germany, the Netherlands and a few others are reluctant to take unprecedented steps and issue mutualized debt.
- Highly-indebted nations, such as Italy and Spain, say this is the only way to tackle the "symmetric shock" from the virus.
Germany needs to understand it will have to fund the post-pandemic recovery across Europe, Spain's economy minister told CNBC Monday, just days ahead of another pivotal meeting for the European Union (EU).
The 27 European countries that make up the EU remain at loggerheads over how to mitigate the economic shock from Covid-19, despite putting together a half-a-trillion-euro package for more immediate spending needs earlier this month. Their main concern now is to present a second plan that will deal with the vast amount of virus-related debt that is expected to creep up across the region.
Nadia Calvino, Spanish economic affairs minister and deputy prime minister, told CNBC Monday that Germany has a budget surplus that it is "quite determined" to use.
"Now, what we need is for them to understand that we need to also fund the recovery of the rest of the (EU) countries, that we need to fund the recovery of the whole of Europe," she added.
The coronavirus pandemic has resurfaced old divisions among the countries that make up the EU. More fiscally-conservative nations, such as Germany and the Netherlands, are reluctant to take unprecedented steps and issue mutualized debt — a financial tool often dubbed "corona bonds" — to deal with the economic ramifications from the crisis. These countries argue that doing so would not be fair to their taxpayers.
On the other hand, highly-indebted nations, such as Italy and Spain, say this is the only way to tackle the "symmetric shock" from the virus. Italian Prime Minister Giuseppe Conte repeated over the weekend that it is time for "corona bonds."
However, Calvino said she had noted some openness from Berlin to design a so-called Recovery Fund.
"What I have seen is a much more constructive approach on the side of Germany and I hope that from now until Thursday, other countries, which maybe are more reluctant, understand that we need to find a way to fund also the recovery together, if we want to be effective and kickstart our economy as fast as possible," she told CNBC's Squawk Box Europe.
The 27 EU heads of state are holding another video call Thursday to discuss more alternatives to deal with the financial crisis.
To overcome the dispute over mutualized debt, the European Commission, the executive arm of the EU, has proposed to set aside some of the funding from the next European budget to support the various economies post-pandemic.
European leaders have to come up with a new budget as soon as possible to fund European projects between 2021 and 2027 — a regular yet politically toxic exercise conducted every seven years.
"The next European budget has to be the European answer to the coronavirus," Ursula von der Leyen, President of the European Commission, said last week.
However, by doing so, European heads of state would be adding another layer of complexity to an already contentious issue.
A new budget involves transfers from every country to a common EU basket that then gets redistributed across the regions for various purposes. The main obstacle is deciding what should get funding, as governments often do not share the same political priorities.
"Hopefully, EU leaders will rise to the challenge on Thursday and agree on a policy response," Florian Hense, economist at Berenberg bank, said in a note Monday morning.
"For better or worse, the way in which euro zone countries work together in the acute phase of the pandemic can shape perceptions of European integration for a long time to come. Better to get it right soon."