New Year's Address

Merkel said the country's economic upsurge this year had been supported by the government's efforts to reform the labor market, healthcare system and tax structures.

"If we were to be satisfied with the first success that we've had, then the economic upturn would turn in to a flash in the pan just like so often in the past," according to a transcript of Merkel's speech which will be broadcast on German television on Sunday evening.

The chancellor, leader of the Christian Democratic Party (CDU) said she was aware of the painful impact of some of her government's reform policies but stressed that the current economic upswing and the fall in the number of jobless in 2006 showed that the government was on the right track.

"That can only give us more encouragement," Merkel said.

Cutting unemployment will be priority in 2007

The chancellor's speech also signals a rejection of calls by Kurt Beck, chairman of the CDU's coalition partner, the Social Democrats, to slow down the pace of reform.

This week, Beck stirred debate by saying Germans could not weather further reforms and that their endurance levels had been stretched to the maximum by painful social and economic reforms this year alone.

However, Merkel and her CDU colleagues as well as German President Horst Köhler, have strongly disputed Beck's comments, saying that structural reform was absolutely necessary if Germany had to survive in the global marketplace and remain internationally competitive.

Merkel also underlined that her primary goal for 2007 would be to cut unemployment. Other aims, she said, would include streamlining the government budget, investing in education and research, improving energy efficiency and fighting climate change.

Referring to Germany taking on both the EU and G8 presidencies on Jan 1, 2007, Merkel said that Europe would work if every nation did their homework well.

"We'll have to work twice as hard in 2007 -- for progress in Europe and for the continuation of the economic upturn in Germany," she said.