Sigmar Gabriel, the number two of Chancellor Angela Merkel and economic minister, made the comments at a news conference and indicated the fallout from the vote to leave the EU in June was a deeper one beyond the economic one that had been expected.
"Brexit is bad but it won't hurt us as much economically as some fear - it's more of a psychological problem and it's a huge problem politically," he said.
"If we organise Brexit in the wrong way, then we'll be in deep trouble, so now we need to make sure that we don't allow Britain to keep the nice things, so to speak, related to Europe while taking no responsibility."
High level talks among the Cabinet are due to be held on Wednesday, where ministers have been asked to put forward their plans for negotiating oan exit. However, there may be some disagreement on the balance between access to the single market and border controls, according to reports.
Gabriel also said ongoing negotiations over a trade partnership known as TTIP between Europe and the US had "defacto failed" but "nobody is really admitting it".