Merkel: EU needs Britain in order to reform

"We need a strong United Kingdom with a strong voice in the EU," Merkel said in English.

After having liberated the continent from Nazi rule, Britain "does not need to bring proof of its commitment to Europe and freedom," she added.

She thanked the 1.7 million British servicemen who served in Germany and said her country was "grateful" to Britain for trusting in German democracy after the horrors of the Second World War.

"We owe it to Churchill, de Gaulle, Adenauer that conflicts of interest nowadays are resolved at table, not on the battlefields," Merkel said, referring to Europe's wartime and post-war leaders.

But with all the focus on what unites Germany and Britain, ranging from foreign policy to EU budget cuts, Merkel from the very outset downplayed expectations raised by British politicians that she will back Cameron's push a complete overhaul of the EU.

"Some expect my speech to pave the way for a fundamental reform of the European architecture which will satisfy all kinds of alleged or actual British wishes. I am afraid they are in for a disappointment," she said.

"Others are expecting the exact opposite, that I will deliver the clear and simple message here in London that the rest of Europe is not prepared to pay almost any price to keep Britain in the European Union. I am afraid these hopes will be disappointed as well."

EU reform, yes, but "step by step," not in "great leaps," the Chancellor noted, switching again to English and quoting from the speech of German President Richard von Weizsaecker, who spoke in the British Parliament in 1987.

On freedom of movement - a thorny issue for Cameron who seeks to curb the access of people from other EU countries to social benefits - Merkel said it was "one of the greatest achievements" of the European project.

"But it is also true that in order to maintain this and gain the acceptance of our citizens, we need to muster the courage to point out the mistakes and tackle them," she noted.

She did not shy away from pointing at the financial sector and its responsibility for the euro-crisis.

"Never again should taxpayers have to pay for the mistakes of banks and financial institutions. The financial industry has a responsibility for the common good. I say that on purpose here in London, because the City of London is of great importance for the European financial market and for the economy of all EU countries," the Chancellor said.