The proposal from the European Commission comes at the demand of EU leaders who have focused on security and defence.
The proposal from the European Commission comes at the demand of EU leaders who have focused on security and defence to provide a new sense of purpose after the Brexit vote last year shook Europe.
The incentive grew stronger after the election of US President Donald Trump, who berated his European partners on military spending at a raucous NATO summit in Brussels last month.
This led German Chancellor Angela Merkel to urge Europeans "to take our destiny in our hands" and warn that the United States was no longer a reliable partner.
Adding to the sense of chaos, is a more assertive Russia and a series of deadly attacks claimed by Islamic State group in France, Belgium and Britain.
The new fund will be unveiled later on Wednesday by EU foreign policy chief Federica Mogherini as part of a broader effort by Commission President Jean-Claude Juncker to work on an ambitious EU defence strategy.
"This is an exceptional moment, taboos are being broken," a top EU diplomat told AFP on condition of anonymity.
The commission will argue that the EU's soon to be 27 member states (minus Britain) can no longer afford to individually pay the high cost of maintaining a military of a global reach.
The new EU fund will consist of two parts, according to earlier drafts.
The first will help member states finance defence research into fields such as electronics, encrypted software, robotics and drones.
A draft unveiled at the end of 2016 envisaged a research programme with an annual budget of around 500 million euros after 2020.
The fund's second portion will pool resources for big-ticket hardware purchases such as tanks, helicopters and drones.
This part would reach a budget of five billion euros a year once fully operational, with the commission arguing that member states waste 25 to 100 billion EU-wide when going alone.
Big questions remain on how the EU budget will pay for the new defence plans. The bloc will soon face an estimated 10-billion euro hole with the exit of net contributor Britain.
European nations also need to meet Trump's demand that all NATO nations meet their commitment of spending 2 percent of GDP on defence.
But France and Germany, the EU's powerhouses, have asked the commission to seize Brexit as an opportunity for further defence cooperation given that Britain has always opposed closer EU defence ties.
London historically has feared that too much cooperation in Europe on military matters would diminish the centrality of US-dominated NATO to Europe's security.
This opposition persists. EU member states last month agreed to set up a military command for training missions, but objections by Britain forced them to stop short of creating a full headquarters.
Brussels has repeatedly denied that it is creating an "EU army".
France has always thought "Europeans must take their destiny into their own hands" on defence, said Sylvie Goulard, France's new Defence Minister.
Europe must stand alone on security, "all while tied to NATO", she said.