THOMAS MATUSSEK, the German Ambassador to the UK, yesterday blamed the parsimonious spending habits of his countrymen for the economic malaise that has led to Germany being dubbed the sick man of Europe.

Herr Matussek said that while low interest rates had fuelled a spending boom in Britain and the US, cutting the cost of borrowing had failed to have the same effect in Germany. Memories of crippling periods of hyperinflation meant that Germans were unwilling to spend more of their earnings or increase their borrowings, Herr Matussek said.

In an exclusive interview with The Times, the ambassador said: “The man in the street still feels he does not know what is going to happen in a year or two. He simply puts his money under the mattress or in the Sparkasse (the German savings bank) and doesn’t spend.”

This reluctance to consume was one of the main reasons that Gerhard Schröder, the German Chancellor, rushed through a €15 billion (£10 billion) package of tax cuts and a series of radical changes to the labour, healthcare and pensions sectors. Herr Matussek described the measures, known as Agenda 2010, as “the farthest-reaching reform project since the war”.

The German economy is struggling. Unemployment is running at above 10 per cent, growth is minuscule and only four other EU members have a lower income per head.

“We are going through a very, very difficult period,” Herr Matussek said. “Germany has turned from the powerhouse to what some people here regard as the sick man of Europe.” The reunification of East and West Germany in 1990 has cost the country €500 billion and is the reason most often advanced for the present problems. But Herr Matussek said Germany’s generous social security system has always proved a huge drain on resources. The labour market reforms contained in Agenda 2010 will go some some way to changing this.

But this is no simple task, as Herr Schröder’s Social Democrat party has always prided itself on its close links with the trade unions. “It’s difficult to tell people we are going to introduce a system of hire and fire, and get rid of the present system of collective bargaining. But it’s no longer question of how we can preserve jobs but rather how we can make sure that those without work can get back into the market.”

From January 1 this year, anyone who loses their job must report to their nearest labour exchange the next day if they wish to receive unemployment benefits. They must also be prepared to take a lower-paid job in a different field anywhere in the country. “Three years ago any Chancellor would have had a revolution on his hands if he proposed this,” Herr Matussek said.

External factors, such as the strength of the euro, have also put pressure on the economy. But even though he was pilloried the last time he dared suggest it, with The Sun saying he had “either drunk too much schnapps or gone potty”, Herr Matussek maintains that Germany would have been worse off had it not joined the single currency. “Inward investment into Germany has increased a lot since we joined the euro, whereas it has decreased in Britain ’s case,” he said.

Accession of ten new members to the EU would also provide a boost. “One look at the map will show you that it’s fantastic for us over the medium to long term. Initially, competition is tough, which is why we negotiated the seven-year transition period for immigrant workers,” Herr Mutassek said.

He said the well-educated workforce of Hungary, Poland and the Czech Republic would be able to do some tasks better than Germans. “We just have to find areas where we are better. The worst thing for any country is to think they can rest on their laurels in a globalised economy.”