According to internal market commissioner Charlie McCreevy, who said he believes the new legislation will pass quickly through the EU law-making process, this would be "to the benefit of all: armed forces, taxpayers and industries."

Currently, internal market rules are not applied to the defence market, allowing member states to exclude defence contracts from EU procurement rules. In addition, national licensing procedures make transfers of defence material between member states complex.

The commission will now proposing specific legislation for defence procurement which should boost competition without completely removing the special status of defence policy within the internal market.

Explaining the motives behind the overhaul, Mr Verheugen said in a press conference that the EU as a whole is lagging behind in terms of the efficiency of its defence expenditure compared to the US.

He stressed that at the same time there are "real threats" to European security and that a number of member states have sent troops to crisis areas around the world, meaning that European armies should have the best equipment and gear.

According to the commission, a common defence market would significantly improve the military capabilities of member states without increasing defence expenditures.

"We're not going to be able to convince citizens to spend more, so we need to spend more efficiently, more prudently, that we get more for what we are able to invest in defence," Mr Verheugen said.

A common defence market is also "fundamental to establishing Europe's autonomy" in the world, he added.

Alexander Stubb, a Finnish centre-right MEP, told EUobserver that he supported the commission's efforts to have a strong defence industry.

But he warned that free competition should not go at the expense of smaller EU arms firms.

"Any proposal that gives an unfair advantage to the US or to the large scale companies of the big member states would be inappropriate. Some exemptions may exist," he said.

"It's an interesting first proposal, but now the real work needs to start in the Council [of ministers] and the European Parliament," he added.

A 2006 report commissioned by the European Parliament estimated that although EU governments spend about half the amount Americans do on defence, their defence capacities are only about 10 percent as efficient as the US.

One of the main reasons is the duplication of member states' defence programmes, with 23 parallel programmes for armoured vehicles.

The EU defence industry as a whole generates about €55 billion in revenues a year.