By Gabriela Baczynska and Jan Strupczewski
BRUSSELS (Reuters) - The European Union's executive unveiled a 750 billion euro plan on Wednesday to prop up economies hammered by the coronavirus pandemic, hoping to end months of squabbling over how to fund a recovery that exposed faultlines across the 27-nation bloc.
The blueprint, if ratified by all, would stand as a milestone in a half-century of European integration, marking a step towards mutualised debt as a major funding tool for the first time and paving the way for greater EU powers of taxation.
It also seeks to spread the burden of recovery efforts as the European Central Bank appears to be reaching the limits of what it can do to ensure the union's financial stability.
The European Commission's proposal drew positive reactions from Paris, Berlin, Rome and Madrid, as well as the European Parliament. The chairman of EU leaders said they should aim to finalise an agreement before the summer break.
Under the proposal, the Commission would borrow from the market and then disburse two-thirds of the funds in grants and the rest in loans to cushion the unprecedented slump expected this year due to lockdowns.
Much of the money would go to Italy and Spain, the EU nations worst affected by the pandemic.
"We either all go it alone, leaving countries, regions and people behind and accepting a union of haves and have-nots, or we walk that road together," said Commission President Ursula von der Leyen.
EU leaders agree that, if they fail to rescue economies now in freefall, they risk something worse than their debt crisis of a decade ago, which threatened to pull the eurozone apart.
"A STARTING POINT"
But fiscally conservative northern countries have resisted pressure from a "Club Med" group to take on mutual debt to protect the EU's single market of 450 million people from being splintered by divergent economic growth and wealth levels.
Austria, one of the "frugal four" that have argued against grants, described the plan as a starting point for negotiations.
"There are countries that must pay, like the Netherlands, the Swedes, the Danes and us. We therefore, out of responsibility to our taxpayers, say clearly that we are in favour of loans," said Austrian Chancellor Sebastian Kurz.
Others say grants are needed because Italy, Spain, Greece, France and Portugal already have high debt and rely heavily on tourism, which has been mauled by the crisis.
The euro <EUR=> rose as von der Leyen detailed the plan -- "Europe's Moment: Repair and Prepare for the Next Generation".
The plan aims to fulfil the Commission's pledge to slash EU carbon emissions to "net zero" in 2050, beef up EU health and defence capability, and prop up firms facing solvency problems.
The recovery fund comes in addition to the EU's long-term budget for 2021-27, which the Commission proposed to set at 1.1 trillion euros ($1.21 trillion), and needs unanimous backing of all EU states and the European Parliament.
The 500 billion euros in grants reflects the wishes of the two biggest EU economies, France and Germany, which came up with a grants-only proposal last week, providing political space for von der Leyen's plan.
French President Emmanuel Macron, who drove the grants push, hopes it will defang populist and nationalist politicians who he says could tear the EU apart and sink the euro.
Despite their fights on how to respond to the crisis, EU countries have already agreed on 500 billion euros of immediate rescue aid and the plan worth 1.85 trillion euros unveiled on Wednesday would come on top of that.
The Commission plans to repay the borrowing with new taxes on sectors such as plastics, digital trade and large corporates.
(Additional reporting by Foo Yun Chee, Robin Emmott, Kate Abnett, Francesco Guarascio, Writing by John Chalmers, Editing by Nick Tattersall)