Prime Minister David Cameron says Britain needs to "stick to the course" if it wants to come through the recession.
In a speech delivered to business leaders and politicians at the World Economic Forum in Davos, Switzerland, he said the economic recovery was "always going to be choppy".
Mr Cameron said stress tests for banks must be more stringent, describing 2011 as a "make or break year" for the recovery.
He said there must be a "genuine single market" in Europe, while markets should be deregulated so businesses can grow.
The PM said it was "not going to be easy" to re-invigorate the economy but to do so Europe "needed to change direction", saying "huge deficits don't just fall out of the sky".
He added: "To get there isn't easy. We can't just flick on the switch of government spending or pump the bubble back up. Making this transformation - and it is a transformation - requires painstaking work and it takes time.
"It involves paying down billions of pounds of debt. New plants and factories need to be built, new products designed, new innovations taken to market, new businesses nurtured.
"It's going to be tough - but we must see it through. The scale of the task is immense, so we need to be bold in order to build this economy of the future."
Mr Cameron said he could not "deny what a difficult position" Europe was in as its share of world output was projected to fall by nearly a third in the next 20 years.
No one was "immune" from the current crisis, he said, but that did not mean he signed up to the "pessimists' charter" that Europe could not compete with the "juggernaut" economies in Brazil, China and India.
For the recovery to succeed, Europe's first priority had to be "kill off the spectre of massive sovereign debts", while governments could no longer borrow such high percentages of their GDP.