The NSA spying scandal featured heavily in the hour-long talk which she gave sitting down due to a skiing accident over Christmas.
"Germany could not wish for a better partner than the United States" she stressed, but conceded that the allies remain "far apart" on the "ethical question" of freedom versus security in state surveillance.
She described the country’s switch to renewable energy, known as the Energiewende, as a “Herculean task”, adding that there was no other country in the world making such a “radical change to its energy industry".
Germany’s green energy push has seen bills rise, but Merkel said that electricity must remain affordable for citizens and businesses.
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Turning towards the euro crisis, the chancellor warned that Germany “must not trust this deceptively quiet time”.
She said that although the crisis was under control it had not been overcome.
Germany would be working on strengthening bonds between pan-European institutions, Merkel said.
The EU's pacts have to be further expanded to be “more stable, citizen-oriented and fairer,” she added.
She told her audience in the Bundestag that she saw Germany as a motor of Europe and stressed the importance on the social market economy which mixes capitalism with a strong welfare state.
Merkel added that the situation in the country was better than it had been in a long time – employment is at its highest since reunification.
"The humanity of a society is reflected in how it deals with the weak…when they are old and when they are sick," she said, also defending her cabinet's recently unveiled pension reform plans.
Her cabinet earlier approved welfare reforms, including lowering the retirement age to 63 for workers who have paid into the pension system for 45 years, despite long-term plans to raise the age to 67.
The move has been criticized by the business community. The president of employers' federation BDA, Ingo Kramer, said it "creates an imbalance to the detriment of younger generations".
The Frankfurter Allgemeine Zeitung (FAZ) said the "grand coalition" government in the rapidly-ageing country "caters mainly to the elderly because voters are getting older".
And the pension reforms, which are forecast to cost €160 billion by 2030, were also attacked by Merkel's predecessor, former Social Democratic chancellor Gerhard Schröder, who drove through tough labour and welfare reforms credited with reviving the economy.
In a new book quoted by Bild newspaper, Schröder charges that the generous reforms sent the "absolutely wrong message" to other European states of whom Germany has demanded tough structural reforms.
Merkel was sworn in for her third term as Chancellor in December, after a clear win for her party in September’s elections.
READ MORE: Merkel rebukes US and UK over spying