By Andrea Shalal, Sarah Young and Adrian Croft
PARIS/BRUSSELS (Reuters) - Europe's politicians need to put aside national pride and security sensitivities and let the defense industry tackle the overcapacity that has led to competing production of tanks and fighter jets, executives and EU officials say.
The industry's outlook is brightening, helped by a stronger economy, increased military spending in other regions driven by tensions in Ukraine, the Middle East and southeast Asia.
France's Dassault, for example, reached deals this year to sell fighter jets to Egypt and Qatar and hopes to conclude a sale to India soon, compensating for falling demand at home.
But Europe has failed to follow the example of the United States, where the defense industry became more efficient after a downturn caused by the end of NATO combat operations in Afghanistan and Western spending cuts.
Efforts by European Union policymakers and industrialists to forge a single European defense market have often been obstructed by individual EU governments which jealously protect their national defense industries and jobs, an issue likely to be discussed at an EU summit on Thursday and Friday to consider how to strengthen the industry.
"A strong European defense market and industrial base can only be achieved with a move away from the existing focus on national markets," the European Commission said in a report prepared for the summit.
"Europe can no longer afford the inefficiencies of duplication and overcapacity that our existing fragmented market entails."
In the fighter jet market, three European aircraft - the Rafale, the Eurofighter, built by Airbus Group, Finmeccanica and BAE Systems, and Gripen, made by Sweden's Saab - compete for business.
There are 11 different armored vehicle programs, shipyards in most countries and makers of submarines in Britain, France and Germany.
"In the last couple of years in the United States, they have done tremendous reshuffling of their capacity, closing down factories and adopting more for less... Some of that needs to happen in Europe as well," Hakan Buskhe, Saab's chief executive, told Reuters at the Paris Air Show last week.
The European defense market has been shrinking, meaning there is less business to go round. NATO says spending on defense by its 26 European members slipped to about $250 billion in 2014 from $275 billion in 2010.
Slower business at home has forced many defense firms to look outside Europe for sales although Russia's annexation of Ukraine's Crimea region last year has spurred some European countries to increase defense spending and Poland is engaged in a major military upgrade.
Previous attempts to reshape Europe's defense industry have often failed as governments hold shares in a number of leading European defense companies, enabling them to influence management, or use golden shares to stop unwelcome takeovers.
The most ambitious effort to reshape Europe's defense landscape, a planned $45 billion merger of EADS, now Airbus Group, and Britain's BAE Systems was abandoned in 2012 in the face of opposition from Germany which doubted the deal's industrial logic.
The European Commission adopted a law in 2009 to try to level the playing field for companies competing for defense contracts and to stop European governments favoring firms in their own countries. But the Commission says governments are still failing to apply the law in some cases.
The EU is working to enforce the law on defense procurement, to make it easier for small defense firms to trade across EU borders and to promote cooperation among European countries on defense projects, such as a planned European drone.
In the absence of a transforming defense merger, European companies have made some divestments during the downturn.
Airbus Group unveiled plans last year to sell half a dozen businesses with combined annual revenues of around 2 billion euros, simplifying its Defense and Space division to focus on warplanes, missiles, launchers and satellites.
Restructuring has gone much deeper in the United States, the world's largest defense market.
U.S. arms makers went through a massive consolidation in the 1990s after the end of the Cold War, with dozens of smaller companies joining forces and ultimately creating a handful of large prime contractors less dependent on any one sector.
Overcapacity in the ground vehicle market forced plant closures and layoffs when the U.S. military began withdrawing troops from Iraq and Afghanistan, and years of budget cuts triggered streamlining across the rest of the defense sector.
U.S. officials are now concerned about the dwindling number of second- and third-tier suppliers in some areas, such as the ground vehicle and aircraft carrier business, worried that a thin supply chain makes companies vulnerable to interruptions in production.
Companies such as Raytheon, Lockheed, Boeing and others are dramatically stepping up their efforts to expand international sales, with a key focus on Asia and the Middle East.
Tensions in the South China Sea have also opened up new markets for U.S. weapons makers, including Vietnam, where Washington has already relaxed its arms embargo to allow limited weapons sales.
(Additional reporting by Tim Hepher in Paris, Sabine Siebold in Berlin, Foo Yun Chee in Brussels; editing by Anna Willard)