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German austerity ‘obsession’ is wrong: Economist

Germany's push for fiscal austerity is preventing the euro zone economy from growing—and instead, the region's debts should be written off in a "modern-day debt jubilee", a leading professor told CNBC on Monday.

"If you have got the private sector paying its debt down and you tell the government to do the same thing, you are saying 'hey guys, let's shrink the amount of money in the economy, and see if you can grow'," Australian economist and author Steve Keen said on Monday.

German austerity push is wrong: Economist
German austerity push is wrong: Economist

Keen—who describes himself as a "long-term critic of conventional economic thought"—spoke to CNBC after data out on Monday showed manufacturing output in the euro zone slowed in August.

Markit's manufacturing purchasing managers' index (PMI) for the single currency zone fell to a 13-month low of 50.7 last month, down from 51.8 in July. This was narrowly below expectations.

The individual PMI readings for Italy and France came in below 50, suggesting that manufacturing output in these countries contracted in August. Germany's manufacturing sector grew, but at its slowest rate in 11 months.

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"The focus is on government debt and that is certainly the German obsession… It is no damn wonder you are seeing those huge negative numbers (from) the PMIs," said Keen, who is head of economics, history and politics at Kingston University, London.

While monetary policy in the single-currency zone has remained supportive, with benchmark rates at all-time lows, Germany has pushed for member countries to adopt strict austerity measures in order to combat high deficits and public debt.

"Germans are wrong. In this situation, they should be running fiscal policy that gives a boost to the economies and slows down the rate at which the private sector is deleveraging," Keen added.

Government deficits remain well above the mandated 3 percent or lower in several euro zone countries. In 2013, Greece clocked up a deficit of 12.7 percent of GDP, while Spain and Ireland both had deficits of more than 7 percent.

To combat the situation, Keen advocated a "modern-day debt jubilee", referencing a movement popular in the 2000s that pushed for developing countries' "unpayable" debt to be cancelled.

"You have got to reduce the load of the debt on the economy, with private debt being the most important one to reduce," he said.

"Okay, it means we made mistakes in the past. Let's admit it and do something about it, rather than leaving it, which is actually making the situation worse."

Ex-French Economy Minister Arnaud Montebourg
Joel Saget | AFP | Getty Images

Criticism of German-endorsed austerity resurged last month, with a rancorous dispute breaking out in France over whether belt-tightening measures were helping or hindering its economic recovery.

Then-Economy Minister Arnaud Montebourg triggered the collapse of the French cabinet last month after he publicly demanded the government abandon austerity. "Germany is caught in a trap of austerity that it is imposing across Europe," he told France's Le Monde newspaper.

Montebourg has since been replaced in his post by Emmanuel Macron, a former Rothschild banker and economic adviser to President Francois Hollande.

—By CNBC's Katy Barnato