Europe Economy

Europe in danger of another 'lost decade': Ifo's Sinn

Europe faces 'lost decade' if no reform: Ifo's Sinn
Europe faces 'lost decade' if no reform: Ifo's Sinn

If euro zone countries like France do not complete vital structural reforms, the currency union faces another "lost decade," Hans-Werner Sinn, president of the Munich-based Ifo Institute, told CNBC.

Rather than the breakup of the single currency, Sinn warned that the euro zone will see another prolonged period of stagnation with weak growth unless countries can boost productivity and complete tough rebalancing programs.

Read MoreUBS Chairman: Don'tgive Germany the wrong diagnosis


"We have already lost, under the euro, one decade because of these enormous capital flows into users in southern Europe which were not so productive and we will lose another decade if we don't act," he told CNBC on Thursday.

Read MoreWhere did the German 'strongman' go?

The euro zone's main problem over the last decade has been that savings have been shifted into southern European nations that have "eaten up" that capital rather than using it to increase productivity in their economies, he said.

Rather than it being a cyclical problem that can be solved with Keynesian economics, Sinn believes it is a "fundamental long-term structural problem."

He added that the European Central Bank (ECB) has the wrong strategy by buying asset-backed securities from the region's lenders. This is a "dangerous" path, he said, that is akin to a "medicine which works like a short term drug" with urgent reforms constantly being postponed.

"I think we will always pour enough new money at the crisis to tame it," he said.

Euro crisis 'under the carpet', could reappear: Ifo's Sinn
Euro crisis 'under the carpet', could reappear: Ifo's Sinn

Instead, Sinn called for struggling southern European nations to undergo painful devaluation in order for them to grow again. There needs to be a realignment of relative prices, according to Sinn, which would mean inflation in Germany or deflation in southern Europe, or both.

Read MoreGerman industry output plunges most in over 5 years

"If you take the pain anyway it won't happen," he said. "The financial crisis is still beneath the carpet and could at any time reappear in the open."

Following the financial crash of 2008, European nations have been busy restructuring and rebalancing their economies, with varying success. Substantial sovereign and bank debt led the euro zone to fall into a prolonged recession in 2011 as the extent of its problems became fully aware.

To help bolster the euro zone's economy, Mario Draghi, the president of the ECB, has kept interest rates low and used cheap-rate long-term loans to pump liquidity into European lenders and promised to do "whatever it takes" to save the currency bloc.

Sinn told CNBC that the crisis was due to credit-financed wage increases over the last decade.

Low interest rates in southern Europe meant that these countries could borrow very easily but failed add to their productivity, he said. Thus, prices increased with a "inflationary credit bubble" building, he added, saying that this had the knock-on effect of depriving these countries of their competitiveness.