The document says: "If there is a genuine peace, a way must be found to resolve the status of Jerusalem as the capital of two states." That can be accomplished with Israeli sovereignty over West Jerusalem, Palestinian sovereignty over most of East Jerusalem (most of which is Arab villages that weren't even part of Jerusalem until the 1967 annexation), with some type of shared rule over the Old City. This seems like a reasonable document to me.
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from the article: Haaretz Exclusive: EU draft document on division of Jerusalem