It is now widely accepted that Europe does not spend enough on defence. Most European defence budgets were dramatically cut back after the end of the cold war and have remained at a very low level ever since.

This governmental parsimony has had a damaging effect in two respects. First, it has resulted in glaringly obvious gaps in Europe's military capability. As the interventions in Kosovo and Afghanistan have demonstrated, European armed forces are not properly equipped, and find it increasingly difficult to conduct operations in coalition with their US partners.

Indeed, Europe's military shortcomings have got to the point where they are now undermining its ambitions to become a respected partner of the US on the international stage. Without sufficient military firepower, the European Security and Defence Policy is in danger of remaining a paper tiger.

Second, the cap on military spending is damaging the European defence industry. In aeronautics, the funding of pan-European projects, such as the A 400 M transport aircraft and the Meteor air-to-air missile, is far from secure. What is more, the lack of investment in research is seriously jeopardising future advances in technology. In other sectors such as land force armaments, the situation is even more serious.

Given the budget limits set in place by Europe's Growth and Stability Pact, which sets strict limits on government deficits, it is unlikely that we will witness much of a change in military fortunes in the near future. The most European citizens can expect is a modest rise in defence spending, and this well below the increase necessary to fill the gaps in our military capability or bail out the arms industry.

If substantially increased spending is not an option, spending more efficiently becomes essential. In theory, everyone recognises that the Europeans must increase their military co-operation so as not to waste what meagre resources they do have at their disposal. But defence remains a national prerogative. True, pan-European projects exist. But a truly international military policy is still a long way off. The result of all this is that Europe's arms factories are plagued with idle capacity while European armies make do with old or inadequate equipment. In addition, there are as many different buyers of weapons as there are countries. This military fragmentation not only leads to huge waste, but also handicaps the European arms industry when competing against the Americans.

It is true that the six principal arms-producing countries in Europe are all signed up to what they call the Letter of Intention, which aims to increase co-operation between them. But this should be seen only as the beginning of the process rather than the end. Europe needs a common defence strategy covering the whole of Europe as well as all the pertinent political, industrial and military issues.

Above all, this strategy needs to address three issues: how Europe can achieve a systematic standardisation of military equipment; what it needs to do in the way of industrial capability to meet its strategic aims; and what institutional and regulatory framework it should establish to produce the most cost-effective results.

The answers to these apparently simple questions are in fact complex. If Europe wants to respond to the triple challenge of improving its military capability, maintaining a competitive industrial base, and respecting the Stability Pact's budgetary decrees, it has to make huge strides in harmonising its procurement policies and creating in effect a defence union.

That does not necessarily mean that arms-purchasing would only be conducted at a pan-European level or that there would be a single European army, both of which are currently politically unfeasible. But it would involve the introduction of common rules on issues such as arms exports as well as European-level procurement agencies dealing with the lengthy process of buying arms. In addition, it would mean establishing common procedures on planning and procurement. It would also mean bringing together certain currently national servicing and logistics operations to cut costs, as well as placing the purchasing and management of certain strategic functions on a pan-European basis such as satellite systems and flight refueling. Preference should be given to transnational arms producers over national suppliers as a means of helping to rebuild the European arms industry.

Such radical reforms need to be handled at the European Union level. Given the political and financial stakes involved, the leaders of the six signatories of the Letter of Intention should ensure that the issue appears high on the agenda of the next inter-governmental conference in 2004. The next review of the EU treaty would provide an excellent chance to rationalise our defence capabilities into a single, stronger force.

Mr Maulny is co-director of the Institute for International and Strategic Relations. Mr Schmitt is co-director of the Institute for European Union Security Studies