Four-year plan

In her first major address since being sworn in for a second term as leader some two weeks ago, Merkel said the most important issue was tackling the fallout from the economic crisis.

She said the Federal Republic of Germany was in the deepest recession of its history.

"Germany is faced with its biggest challenge since reunification," Merkel said, stressing the importance of finding short-term solutions to the crisis while setting the course for the long-term.

Her new coalition understands what had to be done, and will take the necessary action, she said.

"In all honesty, the path before us won't be easy," Merkel stated, adding that she couldn't "promise everything would instantly improve." But what she could offer, she said, were plenty of reasons to be confident.

Not reached the bottom yet

However, the Chancellor also predicted that the full extent of the crisis would not be revealed until next year.

"Joblessness has risen and will rise further," she said, adding it was only only thanks to a government scheme called Kurzarbeit (reduced work), which subsidizes shortened working hours, that more jobs were not lost.

"Therefore we will extend the Kurzarbeit scheme," she said.

She said the nation would be looking at a budget deficit of 86 billion euros ($129 billion) in 2010, and would therefore also be faced with the most severe cost-cutting meausres in the country's history.

Merkel said the new government was planning the swift creation of conditions for economic growth and called on parliament to support the passing of new tax laws.

"What we need is decisiveness," she urged.

Climate issue

And that decisiveness is needed outside Germany too. An important player in efforts to reach global consensus over the reduction of carbon emmissions, Merkel underlined the importance of making the most of next month's UN climate conference in Copenhagen.

"We would never allow the worldwide financial and economic crisis to be a cheap excuse for failing to protect the environment, that would be the biggest error we could make," she told parliament.

She warned that failure in Copenhagen would set back progress on international climate policy by years. Years that the world can ill afford.

"Time is running out and the EU has developed a clear and distinct negotiating position. Now we expect commitments from the United States and countries like China and India. And I will lobby for this personally and obviously... I will go to Copenhagen."

The thorny issue of Afghanistan

Chancellor Merkel said the time had come for a "new phase" in Germany's Afghanistan mission, which she described as a particular challenge.

She said the planned Afghanistan conference at the start of next year would provide an opportunity to talk about the new phase with Germany's allies and the Afghan government.

"We want to determine a responsible handover strategy," she said, adding that she expected good governance from Afghanistan.

Fast and reliable plan

On the subject of Opel, which General Motors decided last week not to sell, Merkel called on GM to present a reliable plan quickly.

"The old government decided on a strategic investor for Opel with good cause, to give it a new future. If we hadn't done this, there would be no Opel today, because GM could not fulfill its responsibility towards Opel as mother company for months," Merkel told parliament.

"I greatly regret the decision of GM. But the workers of Opel need more than our regret, they need a concrete solution, a solution that offers job security." She said GM's decision to keep Opel could only work if GM were to absorb the lion's share of the restructuring costs.

"We expect the company in the future to be as committed to its European sites as to its American ones," Merkel said.

tkw/AP/dpa/reuters/AFP

Editor: Jennifer Abramsohn