Europe Economy

Germany's economic critics 'can't have it both ways': Ifo

Germany surplus critics 'can't have it both ways': IFO Institute

International critics of Germany's large current account surplus should be careful what they wish for, the President of Germany's influential Ifo Institute for Economic Research told CNBC.

"Those people that demand that Germany reduce its current account surplus must accept that it means less public capital export to other countries, fewer rescue packages, less ECB action and so on – you cannot have it both ways," Hans-Werner Sinn, President of the Ifo Institute for Economic Research, told CNBC Europe's "Squawk Box" on Wednesday.

"You can't say that Germany should reduce the current account surplus and export more capital to other countries to rescue them, that's impossible," he remarked.

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Sinn's comments come after Germany came under pressure regarding its export-led growth. Last year, complaints came from both the European Union (EU) and the U.S. Treasury that Germany's current account surplus (which includes trade as well as flows of money and investments) was growing at the expense of the country's euro zone neighbors and creating deflationary pressures.

(Read more: German business: Europe should copy, not criticize surplus)

Figures released last week showed that the euro zone's largest economy ran a trade surplus for an eighth consecutive year in 2013 and on Tuesday, the Munich-based Ifo think tank said that the German current account surplus probably hit a new record in 2013 of about $260 billion.

Furthermore, Ifo said that the German surplus was "probably the largest in world" as it was far higher than the world's leading exporter China, in second place with $195 billion. It said this had come about as Germany had put its savings into euro zone bailouts and financial aid during the economic crisis.

(Read more: Jack Lew to press Germany to boost domestic demand)

Ifo added that the imbalance was essentially the result of "continued low competitiveness" in other euro zone countries and could only be rectified if supply-side reforms were carried out to improve competitiveness. The group recognized, however, that "the process is extremely tedious and painful for the economies of southern Europe."

Speaking to CNBC in Berlin, Sinn remarked that although Germany needed to stimulate demand for imports, southern European countries also needed to continue with reforms in order to regain their competitiveness.

"The rebalancing requires a realignment of relative prices in the euro zone so if the South becomes more competitive then automatically Germany reduces its competitiveness because the euro will adjust, and then gradually we will return to normal -- this situation [currently] is abnormal and needs to be changed."

Although it was tempting and could "alleviate the pain," Sinn believed the European Central Bank should refrain from launching a scheme to stimulate lending in the region similar to the U.K.'s "Funding for Lending" scheme, despite a slump in domestic demand and corporate investment in struggling euro zone countries.

"The truth is that only through a period of austerity is there any chance for the euro zone to survive and for these countries to regain their competitiveness, it's a very painful process that we cannot avoid. The painkillers have been given now for a couple of years- we're in the seventh year of the crisis and you cannot give too much of it. The real rescue operations are those in the structural parts of the economy."

Speaking to CNBC earlier on Wednesday, however, Portugal's secretary of state for European Affairs turned the tables on Germany, saying that it needed to make structural reforms too.

"The thing that I think Germany should focus on in order to help us overcome the crisis is structural reform- it's important for Germany, not just Portugal and other countries in crisis. Reform of the German service sector would help increase demand and help rebalancing in Europe, this should be the priority in our opinion."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow us on Twitter: @CNBCWorld