The Volkswagen emissions scandal was a “dramatic event” but would not inflict lasting damage on Germany’s reputation, Angela Merkel has said.
The German chancellor said on Sunday that the car maker now needed to provide the “necessary transparency”.
“It is of course a dramatic event which is not good,” Mrs Merkel said.
“But I think the reputation of German industry… is not so shaken that we are no longer considered a good place to do business.”
VW has admitted that as many as 11 million diesel vehicles worldwide were fitted with a so-called defeat device that allowed emissions tests to be rigged.
The gadget detected when the car was being testing and switched the engine to a low-emissions mode.
It then turned that mode off when the car was on the road, meaning that it had far higher emissions than permitted.
Martin Schulz, head of the European Parliament and a German Social Democrat, said the affair was a “heavy blow for the German economy”.
“It’s hard to believe what was done there negligently and possibly even with criminal energy,” he said.
“But I believe that Volkswagen is a strong company that has every chance of surviving the crisis.”
The car maker’s incoming chairman, Hans Dieter Poetsch, has described the emissions scandal as a threat to the company’s survival but one that it could overcome.
His comments, made at an internal VW meeting this week, were reported by the Welt am Sonntag newspaper.
The scandal has sent Volkswagen shares down by more than 40% since it broke last month and prompted the resignation of chief executive Martin Winterkorn.
VW has promised to determine who was responsible and has opened an investigation led by a team of US lawyers.
It has set aside €6.5bn (£4.8bn) to cover the cost of the scandal, but analysts say the final bill could be much higher.
VW has said it will have to refit up to 11 million cars and vans that have the rogue software.
Several VW engineers had admitted to installing the defeat devices in the company’s vehicles, according to another German newspaper report.
Bild am Sonntag reported that the employees had told the company’s internal investigation they installed the software in 2008, but did not reveal their identities or say how many were involved.
The engineers said the EA 189 engine, developed by VW in 2005, could not have complied with pollution regulations and cost targets without the deception.