The EU's greatest challenge is making it clear to ordinary citizens that they benefit from the bloc's increased integration and expansion, Merkel said in her first speech to parliament on European policy since she took power six months ago.

"We have to realize that Europe is not very popular among Europeans," she said in a speech to the German lower house of parliament. "We have to put citizens first."

To make the benefits of the EU clear, the German leader said Europe needs to flex its economic muscles and prove it is capable of acting on the world stage.

"Europe has to show that it can mould world policy according to its own values," Merkel added.

EU constitution and expansion need reexamination

Merkel also said when Germany takes over the EU's rotating presidency in 2007 it would work to promote the European Constitution despite its rejection by French and Dutch voters last year. The failure of national referendums in France and the Netherlands threw the EU into one of its most difficult periods in its 50-year history.

"We absolutely need the constitution to ensure the European Union is effective and capable of action," Merkel said, but she also warned of moving too hastily. "We must reflect how we can bring the constitution project to a successful conclusion."

EU Commission President Jose Manuel Barroso, however, asked the 25-member union on Wednesday not to make a final decision on the constitution until 2008.

Merkel also addressed European expansion, another key issue that divides EU member states. She said that Bulgaria and Romania -- set to enter the bloc in 2007 or 2008 -- would "clearly" become members. But in an allusion to negotiations with Turkey, she said expansion could not be a "one way street" and that the union needed alternatives to full membership.

"A body that does not have any borders cannot act cohesively," she said.

Before taking over as chancellor, Merkel advocated a "privileged partnership" status for Ankara and warned that full membership for the largely Muslim country could prove too heavy a burden for the union.

Germany must meet euro criteria

Merkel defended economic measures Germany has put in place to meet the European Union's Stability and Growth Pact, which limits new debt to 3 percent of the gross domestic product. Germany plans to meet the rules in 2007 after breaching them for four years in a row.

"It is not all right when we violate the stability pact for the third, fourth, fifth time because we don't meet our own requirements," Merkel said.

Reaching Europeans on an economic level is easiest when Brussels works to revive the economy and lower unemployment, Merkel said.

"If we honestly answer these issues, then we will reach Europeans and not just with words but with actions that follow the words," she said.