At present, EU states collectively spend $232 billion a year on defense, compared to over $400 billion in the United States.

But defense analysts estimate that Europe's real military capability is 10 percent of America's due to high wage and pension bills, obsolete equipment and lack of integration between EU armed forces.

It is a similarly sorry story with defense procurement, where EU states spend $39 billion a year on new equipment - compared to America's $100 billion - but get a fraction of the return on their investment because of duplication in research and development and national barriers to open competition in the defense sector.

"Taxpayers should get the most out of the investment they make in security," said a recent European Commission paper on the EU defense industry. "There is ample evidence that this is not the case at present and that a European defense equipment market would bring significant savings in costs."

The defense industry is currently one of the few sectors exempt from EU single market rules, with member states citing national security reasons to jealously guard national arms suppliers.

The commission believes lack of competition in the defense industry is pushing up costs for taxpayers, putting European firms at a competitive disadvantage on the world market and hindering the development of an integrated EU defense capability.

The Brussels-based executive body argues this closed shop approach has repercussions for the transatlantic relationship.

"A reinforced European defense and technological industrial basecan provide an important contribution to collective security in the context of NATO and other partnerships," it said in a March 2003 policy paper.

The commission knows that member states will never open up their entire defense industries to competition - the procurement of nuclear missiles, for example, will always remain in the hands of national capitals - but it argues that clear rules are needed for military contracts within the bloc.

EU governments appear to be listening. Last year, they set up a European Defense Agency to promote the joint procurement, research and development of military equipment.

And earlier this month, national armaments directors from 24 EU states - Denmark has opted out of military cooperation - mandated the EDA to draw up a voluntary code of conduct on arms procurement.

In an interview with the Financial Times Tuesday, the agency's head, Nick Witney, said he expected defense ministers to agree the code in the fall.

"We have started a process and I am pretty confident we can get a 'Go' decision," he said.

A spokesperson for the agency said one pilot project might involve "land systems" such as armored vehicles. All EU states are increasingly ditching heavy, slow and cumbersome tanks for lighter, faster and more mobile armed personnel carriers - such as Bradleys - that can be loaded on to C-130 transport planes for quick deployment in combat zones.

Experts estimate that European defense forces will need to order 10,000 such vehicles over the next decade. Witney also believes European countries should cooperate in developing unmanned aerial vehicles and eventually wants "most defense procurements to be advertised properly around Europe."

Pooling research and development costs and opening up procurement to non-national bids would certainly lead to economies of scale, but Tomas Valasek, director of the Center for Defense Information think-tank in Brussels questions whether member states will ever truly loosen their grip over purchasing arms.

"In times of war, no government wants to leave ammunition supplies in the hands of another country."

Valasek says that past experience with cross-border procurement schemes, such as MEADS (Medium Extended Air Defense System) is also likely to weigh on defense ministers' minds when they contemplate pooling resources or opening up closed markets to competition.

"Multinational procurements have tended to go over budget, lag behind schedule and produce something different from what ministries ordered. Instead of getting a horse you end up with a camel because each country wants to add a hump to the design."

Burkard Schmitt, an analyst at the Paris-based EU Institute of Security Studies also believes Witney is "extremely optimistic" about the prospects of defense ministers agreeing to greater competition in the sector by the end of the year.

"Istrongly doubt that a purely inter-governmental agreement will change the behavior of member states. When it comes to procurement, defense ministers are like smokers - they know their actions are unhealthy but they don't know how to stop."

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