In a highly anticipated speech the Chancellor will send a message to other European leaders: "We cannot go on like this."
Mr Osborne will say the UK Government wants to remain part of the EU after the in/out referendum on the issue pledged by David Cameron. But he will add: "There is a simple choice for Europe: reform or decline. Our determination is clear: to deliver the reform, and then let the people decide."
The Prime Minister has pledged to renegotiate the UK's relationship with the EU before the 2017 referendum.
Mr Osborne will say that the "biggest risk" facing the EU comes not from the referendum vote - but from doing nothing to change the organisation.
Sounding the alarm on economic growth, he will say that over the past six years Europe's economy has stalled while other countries have stormed ahead.
"In the same period, the Indian economy has grown by a third, the Chinese economy by 50%," he will say.
"Make no mistake, our continent is falling behind."
He will also warn that the EU faces another crisis, like that which engulfed the nations within the eurozone, unless it changes.
His speech will suggest that Europe's problems include a lack of innovation, growing youth-unemployment and high welfare spending.
Mr Osborne's comments come just days after the Tory high command was accused of being out of touch with ordinary members and many of its own MPs over the issue of Europe.
At the weekend almost 100 Tory MPs signed a letter calling for the Westminster Parliament to be given a veto over current and future EU laws.
But within hours that demand was dismissed by ministers as unworkable and unrealistic.
Opinion polls suggest that the Conservatives could trail behind the eurosceptic Ukip in the European Parliament elections later this year.
Sources close to the Chancellor said that his message was that reform was the "only game in town".
"We want to stay in the EU, but we need change," he added.
Mr Osborne will make his comments at a conference on potential EU reform organised by the think tank Open Europe and the Tory Fresh Start group.