UPDATE 2-Europe considers euro zone budget, pooling borrowing

* Report charts path for tighter integration in euro zone

* Paper from EU's Van Rompuy recommends central budget

* Report suggests countries pool short-term funding

* Van Rompuy says no clear-cut concept yet on budget

(Adds comments by Van Rompuy in Helsinki)

By Luke Baker and John O'Donnell

BRUSSELS, Oct 12 (Reuters) - Euro zone states should consider clubbing together to borrow as well as paying into a central budget that could be used to help struggling peers, according to a report prepared for a meeting of EU leaders.

The interim report charts a path towards closer fiscal integration among the 17 countries using the euro as they struggle to contain an economic crisis. It was prepared by Herman Van Rompuy, who as president of the European Council will chair a European Union summit next week.

In the interim paper, obtained by Reuters on Friday, officials write of the need to explore a central budget for countries in the euro zone.

Van Rompuy's thinking - firmly backed by Germany - is that some form of "fiscal capacity" among the euro-area countries would allow them to iron out labour market and other socio-economic imbalances that build up in the bloc.

The fund could be used to help a country such as Spain, which has unemployment of 25 percent and is struggling to reinvigorate growth. In exchange for budget rigour, the pan-euro zone fund could provide targeted assistance.

"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," officials wrote.

The 27 countries in the European Union currently finance a budget which amounts to around 130 billion euros a year - 1 percent of EU output - and which is used for spending on agriculture, science, infrastructure and other areas.

But there is no equivalent budget among the 17 countries that share the euro, a shortcoming that many economists believe has undermined the stability of the currency project.


Germany and France strongly support the proposal and, in a surprise to many EU diplomats, Britain does too, but for different reasons. London sees a euro zone budget as a way of further separating Britain and its increasingly EU-sceptical electorate from the currency bloc and its problems.

Van Rompuy, visiting Helsinki on Friday, said the idea of the single euro zone budget would not "imply or necessitate permanent transfers" from one state to another. But he also stressed that he was not making any concrete proposals for now.

"I simply propose that we examine further some of these ideas ... Also on the so called euro zone budget ... There is no clear-cut concept to this at this stage."

Prepared in conjunction with European Commission president Jose Manuel Barroso, the president of the European Central Bank, Mario Draghi, and Jean-Claude Juncker, president of the Eurogroup of finance ministers, the report also addresses the contested idea of pooling country borrowing.

It advocates examining "the pooling of some short term sovereign funding instruments, for example, treasury bills, on a limited and conditional basis". The report is due to be finalised in December.

Such a move in the short term would be viewed sceptically by Berlin, which is reluctant to see weaker euro states piggyback on its economic strength in order to borrow more cheaply.

Berlin may however be prepared to consider such a step in the distant future after Europe has taken significant steps towards a tighter political and fiscal union.

Van Rompuy also said in Helsinki the November summit of European leaders should agree on a future framework for the whole European Union's budget, acknowledging the difficulty of finding a compromise among the member states.

(Additional reporting by Jussi Rosendahl; Editing by Catherine Evans)

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