Launching Britain's six-month rotation of the EU presidency, he warned on Thursday that the European Union risked failure if it did not modernise and meet the needs of its citizens.
"If Europe defaulted to euroscepticism ... then we risk failure, and failure on a grand strategic scale," he said in Brussels, Belgium.
Setting out Britain's priorities for its presidency of the bloc beginning on 1 July, he said serious progress on structural economic reform would build public support for sensible, rational fiscal policy.
"And we need such reform urgently in Europe, if Europe is to grow," Blair said.
He also said it was wrong to describe the choice as being between political union and a mere free trade area, as German Chancellor Gerhard Schroeder has repeatedly done.
"Now almost 50 years on, we have to renew and there is no shame in that. All institutions must do it and we can, but only if we re-marry the European ideals we believe in with the modern world we live in," Blair said in his speech that was met with applause but also sporadic heckling.
Not just economics
Declaring himself a "passionate pro-European", he also denounced those claiming that Britain was pushing for the EU to become simply an economic free trade zone, saying it was a "misrepresentation" and that he also backed a modern social Europe.
"Now almost 50 years on, we have to renew and there is no shame in that. All institutions must do it and we can, but only if we re-marry the European ideals we believe in with the modern world we live in"
UK Prime Minister Tony Blair
He said the debate over Europe was not simply between a common market and a social Europe.
"I would never accept a Europe that was simply an economic market," he added.
"The issue is not between a free-market Europe and a social Europe, between those who want to retreat to a common market and those who [see] people in Europe as a political project," he said.
"This is not just a misrepresentation. It is to intimidate those who want to change Europe by representing the desire for change as a betrayal of the European ideal."