Helmut Schmidt takes a last, long drag on his cigarette and stubs it out. Within a minute, the man who piloted what was then West Germany through the last global economic crisis leans forward to pluck another smoke from the box he keeps on his desk on the sixth floor of Die Zeit's offices, where he is a publisher, in Hamburg.

Rumour has it that Schmidt has 30,000 menthol fags stashed away in readiness for a possible EU-wide ban. As one butt follows another into his ashtray, the former chancellor bemoans the leadership vacuum that is hobbling Europe, discusses the respective merits of British prime ministers, and questions whether it would be a good thing for the UK to join the euro.

But first, he wants to talk about how his first interview in the Guardian was carried 81 years ago, when the 14-year-old Schmidt came over in the last days of the Weimar Republic on a pupil exchange visit to Manchester. The piece was headlined "Too Many Kisses" after Schmidt complained that the mother of the boy he was staying with was a little too keen to show her German visitor some Mancunian affection.

Born in the year the first world war ended, Schmidt was a young soldier at the siege of Leningrad, was awarded the Iron Cross, rose to prominence as a politician who got things done during Germany's postwar economic miracle and became chancellor when Willy Brandt resigned as a result of a spy scandal in 1974, just as the first oil shock brought the long boom to an abrupt end.

To this day, he remains dubious about the value of the security services. With anger in Germany at the alleged US surveillance of Angela Merkel's mobile phone calls, Schmidt says he never had any confidence in the spooks. "I was in government for 13 years and in that time only once met the head of the German security services, and that was because he was an old friend. Otherwise, I carefully avoided having anything to do with these people. They are unavoidable but not really necessary."

From the start of his eight years as chancellor, he knew that the times were changing: "I was quite aware of that. It was a sea change. It was an ebb tide after a flood tide.

"During the Yom Kippur war the Saudis decided to squeeze the west by limiting their exports of oil, thereby allowing the price to rise fourfold within a year. There was another increase at the end of the 1970s, by which time oil prices were 10 or 20 times higher than they had been in the 1960s. This situation created a worldwide recession. In my view, it only needed one more step to lead to a worldwide depression."

Schmidt is now hard of hearing and walks with the help of a frame, yet is in remarkably good health for a man of 95 who has chain-smoked all his adult life. Out of office for more than three decades, he has strong views about the state of the European Union that he helped to forge out of the tough economic conditions of the late 1970s and early 1980s.

"The state of Europe is problematic. European institutions are not really functioning any more. Why? Because of a lack of leadership."

Schmidt, a Social Democrat, is speaking as talks continue between his party and Merkel's Christian Democrats over the formation of a coalition government. The expectation in Europe is that Merkel will be more willing to show leadership on issues such as banking and fiscal union now that the German elections are out of the way. Schmidt has his doubts.

"Despite the economic strength of modern-day Germany, she must not appear as the leader. It is an enormous piece of art to be a leader but not to appear a leader. It needs feeling in the tips of the fingers."

Merkel's approach is conditioned by her background, he says. "She grew up in the DDR [East Germany]. She was in favour of liberty but not Europe. Only after 1990 [when Germany was reunited] did she understand that liberty and Europe were amalgamated."

Schmidt says he is concerned about the "enormous, outlandish" debts of Greece, Spain, Portugal, Cyprus and Ireland and about the lack of jobs for the young.

"We need a better co-ordination of fiscal policies. We need more solidarity in order to cope with these debts.

"The most immediate danger is youth unemployment, which in some countries is above 50%. This is a timebomb. I remember the youth movement in 1968. It started on American university campuses as a protest against the Vietnam war, then came to Paris, Frankfurt and Berlin. Within a year you had an uprising of youth against their elders. The same could happen as a result of youth unemployment in Greece or Spain. It must not happen but it is a possibility."

Schmidt says it would help the rest of the eurozone if Germany ran down its current account surplus, now 6.5% of national output. "It is a ridiculous, enormous sum. It is larger than the current account surplus of China. It is bigger than that of Japan, Saudi Arabia and the other oil-producing countries. If you have a surplus of this size you either have to revalue your currency or, if you can't do that because of the euro, you have to find other ways of reducing it."

The crisis of the 1970s led to greater European co-operation, including the creation of the Exchange Rate Mechanism (ERM), under which countries agreed to peg their currencies to a virtual currency, the European currency unit. Schmidt thinks the euro will probably survive the current crisis. "The probability of a collapse is not zero but it is close to zero. The likelihood of it being a success is not 100% but it is close to 100%."

Schmidt tried to persuade his good friend Jim Callaghan, then prime minister, to take Britain into the ERM in the late 1970s but was rebuffed. "Britain joined late and destroyed it," Schmidt says, referring to sterling's two-year membership of the ERM, which ended on Black Wednesday in September 1992.

His experience of dealing with the UK's often fraught relationship with the European Union makes Schmidt dubious about whether British membership of the euro would be a good thing.

"I had been very disappointed by Harold Wilson and Margaret Thatcher. I had thought it was absolutely necessary to include Britain into the European Community. It happened in the end under Ted Heath. He was the only British leader who believed in Europe. The others only paid lip service. Neither Harold Wilson nor Margaret Thatcher wanted the EC to be a success; they only wanted a thumb in the pie." Wilson he describes as "a tactician"; Thatcher as a "British nationalist".

Asked whether Britain will ever join the single currency, Schmidt says: "I don't know. I don't know whether I would like Britain to join. The British are very stubborn. The Queen, the Commonwealth and the special relationship with the US is much more important than Europe. Britain still believes in the old values and it has every right to do so. Britain is less European-minded than Greece.

"Winston Churchill was a great European but he was quite clear that Britain was not joining because it had the empire. But it's gone, even though you think it still exists."

He adds: "Britain has a problem which that will make itself felt in the next 15-20 years. In the 19th century it was the most advanced engineering nation in the world. Now it has more or less given up on engineering and replaced it with finance. That means you can be hurt."

And does he actually have 30,000 cigarettes stockpiled? "Don't believe everything you read in the papers," he says with a smile.