* Obama says policies must be adapted if goals not reached
* Must not lose young European generation to unemployment
BERLIN, June 19 (Reuters) - The need to balance budgets should not distract from the ultimate goal of economic policy, namely improving people's lives, U.S. President Barack Obama said on Wednesday in what appeared to be a dig at German Chancellor Angela Merkel's focus on austerity.
Standing alongside Merkel at a news conference in Berlin, Obama said policies should be changed if they made people worse off, or led to higher unemployment..
"All of us have to make sure that our budgets are not out of control. All of us have to undergo structural reforms to adapt to a new and highly competitive economy," Obama said.
"What's true though is that all of us also have to focus on growth and we have to make sure that in pursuit of our longer-term policies ... we don't lose sight of our main goal, which is to make the lives of our peple better," he added.
Germany has championed the need for structural reforms and fiscal consolidation in struggling euro zone countries like Greece and Spain, where youth unemployment has surged to around 60 percent.
It is now adjusting its emphasis on austerity and launching programmes to combat joblessness in southern Europe. Merkel herself will host a youth unemployment conference with fellow EU leaders next month.
But many still blame her for their economic woes.
Protestors in countries like Cyprus, Greece and Portugal have taken to depicting Merkel with a Hitler moustache or in a Nazi uniform.
"If for example we start seeing youth unemployment go too high, then at some point we have got to modulate our approach to ensure that we don't just lose a generation who may never recover in terms of their careers," Obama said.
The euro zone economy is struggling to escape a second consecutive year of recession and high unemployment has provoked concerns about social unrest, but Obama said he was confident Europe would pull through successfully.