The European Commission wants to change trade laws to open up defence equipment contracts to EU-wide competition.
At present, the European Community Treaty allows governments to restrict defence contracts to companies in their own countries on grounds of national security.
In a statement, EU Commission Vice-President Guenter Verheugen says opening the market for defence products "will improve the competitiveness of the technological and industrial base of the European defence sector".
Verheugen says public opposition to increased defence spending means the European defence industry must become more efficient to compete globally.
EU internal market and services commissioner Charlie McCreevy believes the armed forces will benefit from a change in the laws.
"This will lead to greater openness of defence markets between member states to the benefit of all: armed forces, taxpayers and industries,” says McCreevy.
The Commission says it hopes the changes will be approved by the European Parliament and member states next year, warning it will fine member states which do not comply to new rules.
Previous attempts to open up the defence market have been abandoned because of strong opposition from member states protecting large domestic companies.
The European Commission can impose fines on member states for ignoring bidders from other EU states.
By Tim McAtackney