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Merkel: Europe can change, but won't satisfy all UK wishes

Europe must reform: Merkel

German Chancellor Angela Merkel has warned UK lawmakers that their wish for a fundamental overhaul of the way Europe is run is unlikely to be satisfied.

However, in her speech to both houses of the UK Parliament on a state visit Thursday, the Chancellor added that the European Union needs to reform its political shape to keep up with the times and emerge stronger from the financial crisis.

In the run-up to Merkel's speech, the British press reported that Prime Minister David Cameron was hoping Merkel would use her address to provide some backing for the U.K.renegotiating its EU membership.

(Read more: Merkel and Cameron: Flirtation or marriage?)

Cameron has promised that if his party wins the election in 2015, a referendum will be held in 2017 regarding the U.K.'s continued place within the EU. The prime minister wants to remain a part of the union, but he wants to appease euroskeptic MPs in his party and bring back certain powers from Brussels to London.

"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," Merkel joked.

"Others are expecting the exact opposite and they are hoping 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 dashed," she added.

In a press conference after the speech, Cameron said he remained confident that the "ongoing conversation" with Merkel and other leaders would result in a reformed EU.

"I believe that what I am setting out - the sort of changes that Britain wants to see, build confidence in our membership of this organization - are possible and deliverable and doable," Cameron said.

He said that he and Merkel agreed Europe faced "an existential economic challenge" and change was required.

(Watch: How will Merkel's visit to London play out?)

Cameron on Germany: 'It's a win-win relationship'

In her speech, Merkel affirmed Britain as an important ally for Germany in Europe, as well as stressing how vital the strong U.K.-U.S. relationship is to ensuring a bond between the EU and the Americans.

Rather than using the speech to offer hope to Cameron, Merkel's speech both called for a stronger, more unified Europe as well as hinting at possible reforms.

She emphasized the importance of the EU and the need for leaders to constantly "renew" Europe, but failed to go into finer details.

At one point, Merkel said that a Europe without borders was a great achievement -- but that the EU needed to muster the courage to point out mistakes and tackle them.

Some analysts read that as a hint to Cameron that she understands concerns about the influx of European migrants entering the U.K. and claiming benefits.

However, at the same time, she was also stressing the greatness of European integration. Merkel also spoke of the success story of the European single market and the need to bring down barriers to trade.

Cameron said he was hopeful for a more open, outward looking and flexible EU, noting that there had been progress in recent years with the cutting of red tape and the EU budget. He added that he now wanted to see a EU/U.S. trade deal and growth on the continent.

Merkel said at the press conference that more defined political goals were needed to work towards an agreement, arguing that discussions were not a piece of cake and that it was going to be hard work.

German Chancellor Angela Merkel and Britain's Prime Minister David Cameron
Dan Kitwood | Getty Images

David Lea, a senior analyst for Europe at Control Risks, summed up the mood regarding Merkel's comments when he told CNBC her speech was "absolutely masterful in tone and execution, while not really saying very much. Or perhaps it wasn't – the only reaction everyone seems to behaving is that it was a masterpiece of saying lots while actually saying nothing."

Carsten Nickel, senior vice president at Teno Intelligence,said that it was clear Merkel was going to disappoint Cameron's high expectations.

(Read more: UK upsets Germany over key EU speech)

"Merkel is generally sympathetic to the British agenda of strengthening member states and - more specifically in the face of EU Eastern enlargement - limiting access to benefits for foreigners," he said.

However, "From Merkel's side, the appetite for outright treaty change is extremely limited these days. With the Eurozone crisis broadly under control due to the ECB's OMT programme, opening up the package of European treaties and agreements - and having to lobby for political backing in Germany afterwards - is something that the super-pragmatic German chancellor is eager to avoid."

Once again, David Cameron will be hoping the Germans can lend a hand in negotiating the U.K.'s place within the European community.

Nicholas Spiro, the managing director of Spiro Sovereign Strategy said Cameron was clearly "desperate" to obtain German support for a renegotiated EU treaty ahead of a possible 2017 referendum, but Merkel's speech did not help.

"She's made it clear that there can be no reopening of the EU treaty and, in any case, is taking a wait-and-see approach when it comes to the U.K., as it's still unclear what the outcome of next year's election is going to be," he said.

—By CNBC's Kiran Moodley. Follow him on Twitter @kirancmoodley