EU report recommends euro zone budget, pooling borrowing

BRUSSELS, Oct 12 (Reuters) - The euro zone should consider pooling some limited short-term borrowing as well as a separate budget that could be used to deal with economic problems in individual countries, according to a report prepared for EU leaders who will meet next week.

In the interim report obtained by Reuters on Friday, officials wrote: "In the longer term, there is a need to explore ... developing gradually a fiscal capacity for EMU (economic and monetary union)."

"One of the functions of such a new fiscal capacity would be to facilitate adjustments to country-specific shocks by providing for some degree of absorption at the central level," said the report, which was prepared by European Council President Herman Van Rompuy.

The report, which will be finalised in December, also advocated the examination of "the pooling of some short term sovereign funding instruments, for example, treasury bills, on a limited and conditional basis."

The report was prepared in conjunction with the president of the European Commission, Jose Manuel Barroso, the president of the European Central Bank, Mario Draghi, and Jean-Claude Juncker, the president of the Eurogroup of finance ministers.

(Reporting By Luke Baker; writing by John O'Donnell)

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