Scholz's sharp words against the Alternative for Germany party came as the far-right group is enjoying a rise in popularity, with latest opinion surveys putting it at 22 percent, above the chancellor's centre-left SPD at 16 percent.
"Most citizens know that the self-called 'Alternative' is in reality a demolition commando -- a demolition squad for our country," Scholz told parliament at the start of budget debate week.
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He cautioned against the AfD's call for a return to nationalism.
"Our prosperity is most tightly linked with the European Union," said Scholz.
"And that's why the calls for new barriers between the member states, for a dismantling of the EU and for a radical dismantling of the welfare state is nothing but wanton destruction of prosperity," warned the social democrat, whose coalition also includes the Greens and the liberal FDP.
Scholz urged the CDU/CSU opposition conservatives of former chancellor Angela Merkel to join hands with his coalition in a "Germany pact" to step up the pace in the country's journey towards a more digital, efficient and sustainable future.
"Only together can we shed off the mildew of bureaucracy, risk averseness and despondency that has set over our country over the years," he said.
Scholz's coalition has drafted plans to cut red tape and plough billions of euros into expanding renewable energy capacities, while easing the burden particularly on small and medium-sized companies by slashing taxes.
Germany is in desperate need of an economic boost, after sinking into a winter recession that the export giant is struggling to climb out of.
The ongoing war in Ukraine, stubbornly high inflation and energy prices have all dampened demand, while at the same time requiring huge outlays from the state coffers.
Germany is the only major advanced economy expected to shrink in 2023, according to the International Monetary Fund.
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