Angela Merkel has insisted there can be no let-up in the painful economic reforms being driven across Europe, despite union leaders warning that the risk of social unrest in southern European countries is increasing.

In a keynote speech at the World Economic Forum's annual meeting, Merkel insisted it was vital to keep driving down labour costs to make Europe more competitive.

"Were we to meet halfway, we would have accepted that Europe will not be competitive globally," said Merkel, adding that this would cause unacceptable damage to Germany's exporters.

She argued that growth and fiscal consolidation are "two sides of the same coin", disappointing Davos attendees who hoped for a thawing on Europe's austerity drive. Merkel also offered some support to David Cameron, agreeing it was important to make Europe more attractive to investors, "to ensure the prosperity of our people".

But labour officials in Davos are deeply concerned that political leaders are still failing to address the issue of unemployment. The easing of the financial crisis has lulled many into a false sense of security, warned Guy Ryder, director general of the International Labour Organisation. "I am often asked whether the levels of unemployment in southern Europe threaten social stability. Yes, it does. But you don't have to wait for a revolution to do something about it," said Ryder. He was speaking as new data showed that 60% of young Spaniards are now out of work.

Merkel insisted current unemployment levels were a price Europe had to pay to become more competitive, and pointed out that Germany had been on the same path, with unemployment hitting 5 million before the public accepted structural reforms.

Sharan Burrow, general secretary of the International Trade Union Confederation, said there was "a real lack of political will" to address the unemployment crisis. "Leaders feel the pressure, but there is only a commitment to a jobs plan in a very few countries," said Burrow. "They are waking up and worrying about stock markets and rating agencies, rather than things people really care about – such as education, growth and jobs."

Merkel ended her Davos appearance with a plea to global international companies to employ more young people in Europe, to bring them "jobs, peace and hope". She added: "I welcome anyone who will give a helping hand to young people."