I'm not a big optimist on Europe banks right now, former German economy minister says

Does Merkel have plan B in mind for DB?
Does Merkel have plan B in mind for DB?

The man who was once tipped to be the next German chancellor has given a gloomy assessment of the country's banking sector, telling CNBC that he would hesitate to invest in European banks.

"I'm not a big optimist on European banking stocks," Karl-Theodor Zu Guttenberg, the founder of New York-based Spitzberg Partners, told CNBC Monday.

Guttenberg was the former German economics and technology minister and was part of Angela Merkel's Christian Democratic Union party (CDU) but left the government in 2011 after being engulfed by a plagiarism scandal. He explained that the recent saga surrounding Deutsche Bank could heap more difficulties on the German chancellor as she would not want to push through an unpopular bailout for the embattled bank but also would not want to sacrifice a "German symbol."

The government has denied any public backstop for the bank which has been asked by the U.S. Department of Justice to pay a settlement of $14 billion. However, Guttenberg said that it would be highly likely that policymakers were making some sort of contingency plans in the background.

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"She'd (Merkel) be extremely reckless to not prepare for plan B," he told CNBC.

He said that the best-case scenario was for the proposed penalty to be negotiated down and for Deutsche to come up with a "viable strategy" for the future that meant that it wasn't just "muddling through."

He added that the worst case scenario for the bank would be a panic reaction by investors and clients in Germany and for the government to "step in too quickly." He also questioned the amount of assets that Deutsche had available to sell if it needed to replenish capital reserves.

Jorg Eigendorf, head of communications and senior group director at Deutsche Bank, has previously told CNBC the bank has a "comfortable cushion" and there was "no reason to be worried."