Angela Merkel said Wednesday that Germany needed to modernize and embrace the "digitalization" of its society and economy, no matter how disruptive such technological change might be.
The German chancellor said otherwise the country risked getting left behind.
"We have sound finances and made good progress in digitalization, but let me be very clear — we are not leading the way in other areas of the digital world," she told an audience at the World Economic Forum (WEF) in Davos, Switzerland.
"We are not leading in other areas of the digital world, for example, society and the state," she added.
"So the next few years to come will have to be under the heading of bringing digital into our education system, the state needs to be digital, people have to be able to communicate with their state representatives through digital and a better ecosystem for start-ups has to be created so that we can be a cradle of innovation."
Get digital, or else
Merkel said Germany was "lagging behind" other countries and named Estonia in the Baltic region of Europe as a pioneer of digitization.
"This is a very serious challenge and we have no time to lose because we know that other parts of the world are developing very, very quickly," she said.
Digitization meant there had to be lifelong learning and it meant new solutions within social systems, Merkel said. "We have to be aware that these disruptive technological changes invariably mean disruptive changes for our society."
She said German society had not shown much preparedness for such changes.
In a closely-watched speech at the annual meeting of political and business leaders, Merkel criticized a trend towards protectionism and isolationism and said that multilateralism was under threat.
Addressing Germany's political impasse, she said that she would continue coalition talks with the opposition and would try to form a government as quickly as possible.