The 27 leaders -- minus British Prime Minister Theresa May -- gathered at Bratislava's towering castle overlooking the River Danube, determined to respond to the challenges of mass migration, security, globalisation and a stuttering economy.
The aim was to thrash out a "roadmap" of reforms during talks in the Slovak capital's towering hilltop castle, and a boat trip down the Danube.
Merkel said the bloc simply had to improve but her influence as leader of the EU's biggest economy has been undermined by her unpopular decision to open Germany's doors last year to nearly a million refugees.
French President Francois Hollande, the other half of the EU's "power couple" with Merkel, was equally blunt.
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"We face either break-up, weakening -- or we choose the opposite, together giving Europe a purpose," said Hollande, who has made common cause with Berlin on boosting EU defence cooperation.
EU President Donald Tusk had warned on the eve of the summit that leaders must "have a sober and brutally honest assessment of the situation."
The leaders want to launch a "Bratislava Process" of reforms at this summit, to be further discussed in Malta early next year and then agreed in Rome in March 2017 to mark the 60th anniversary of the founding of the EU.
European Commission head Jean-Claude Juncker had meanwhile submitted his version yesterday but there were no major differences and it "mirrored" what was being discussed, the official said.
Greeted by soldiers in bright blue uniforms and ceremonial plumes, the leaders held a first round of talks in the castle then lunched on a river cruise on a German-flagged boat down the Danube to informally discuss Brexit.
The 27 leaders have insisted there will be no formal Brexit talks until Britain triggers the two-year divorce process and says what it wants.
Boosting defence cooperation is a key issue for the leaders who hope it will give them something to rally around after deadly terror attacks in France and Belgium.
Juncker earlier this week proposed an EU defence headquarters and a common defence force, both ideas that Britain had previously nixed because they might overlap with NATO.
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