The has suffered because of the council's reluctance to deal with the private sector, according to the Local Government Secretary.
Eric Pickles said the failings of the £188 million library, which will open for just 40 hours a week following budget cuts confirmed this week, was symptomatic of the council's refusal to change.
In an interview with the Post, he warned the needed to change from its "old fashioned" approach to local governance, and claimed, if it did, it could become a "global force".
However, the spectre of a possible break-up of the authority still looms, after within 12 months.
But Mr Pickles said it would "break his heart" to see that happen.
His remarks drew an angry response from city council leader Sir Albert Bore who dubbed it "disingenuous" and a means of diverting attention away from cuts with the General Election looming.
The council's 2015/16 budget, which was rubber stamped this week, will see £1.3 million cuts at the library, with opening hours slashed from 73 to 40 hours a week and more than 90 redundancies.
Mr Pickles said the recent damning report by Sir Bob Kerslake highlighted the authority was reluctant to partner with private firms and wanted everything to have a "Birmingham City Council logo".
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"They are too hung up on wanting it all for themselves when there are a lot of people out there who would give their eye teeth to be involved in something like that," he said.
"With the library, we have now got to get around and look at partnership with the private sector.
"The Kerslake Review said if they don't have a Birmingham City Council logo on it they are not interested. We have got to look at ways we can bring other people and other funding streams in so the people of Birmingham can enjoy it."
The library cuts mark a major knockback after the fanfare of its grand opening in September 2013, seven years after it was first mooted by then council leader Mike Whitby.
The changes mean the opening hours will be shorter than the central libraries in Liverpool, Bristol, London, Glasgow, Sheffield, Leeds, Manchester and Nottingham, despite far greater investment.
In response, Sir Albert told the Post: "Everything Eric Pickles has said is the usual electioneering we get around the time of budgets."
The council leader said the library was costing the council £22 million a year - equal to its entire economic development budget - £12 million of which is down to borrowing because falling land prices in the recession meant funds from Paradise and other schemes were not realised.
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He added: "There was a development trust set up which was supposed to come up with large sums of money which never materialised.
"At every turn, things have not gone to the advantage of the council and we have been left with a very costly project."
Sir Albert also took umbrage with suggestions from Mr Pickles the council was not keen to work with the private sector.
He said: "The work around Curzon Street and Snow Hill is all with the private sector. Everything Marketing Birmingham does is about engaging the business community.
"I think this council is one of the most switched-on when it comes to engagement with business."
Meanwhile, the council faces being taken over by central government or broken up if it cannot show it is beginning to improve within 12 months.
The Kerslake review into the authority's failings states: "There must be demonstrable improvement over the next year or the panel will also need to decide whether further consideration is needed to establish the relative benefits and disbenefits of breaking the authority up."
Mr Pickles said it would be "dreadful" to see the council broken up but it was vital progress was made working alongside a
"It would break my heart for that to happen," Mr Pickles said.
"Birmingham is a massive power inside local government but it has been below par and the Kerslake Report was about bringing Birmingham back to the glories it once occupied. With John Crabtree working alongside, hopefully he can help them achieve that."
He added: "Birmingham is Birmingham. When you meet a Brummie, you know it is a Brummie.
"Councils should represent communities and Birmingham is a real community. In terms of local government, it is a big council but it is not an unmanageable council. It just needs to get a grip on reality.
"Things have moved on with local government. Manchester and other parts of the country have been able to embrace these changes but Birmingham still has an old-fashioned view."
Elsewhere, government ministers have criticised the council for failing to protect services by doing a better job of collecting council tax and dipping into its reserves.
The comments provoked an angry reaction, both from the council, which points to a collection record of 98 per cent, and the Labour party which accused the Government of imposing higher cuts on Birmingham than other authorities.
Birmingham says it needs to make savings of £821 million per year by 2018, in comparison to the budget it had in 2010.
Alongside library cuts, other measures include cutting cemetery and crematorium maintenance and increasing parking fees by ten per cent.
The authority is also making some cuts to provision of day care services for the elderly and youth services although overall spending on these services will increase.
And it is increasing council tax by 1.99 per cent, the highest increase allowed under government rules without triggering a referendum.
Mr Pickles' department has published a league table highlighting the worst offenders for not collecting council tax - with Birmingham, perhaps unsurprisingly as the largest authority, in top place.
City residents have arrears of £105.2 million, according to the Department for Communities and Local Government (DCLG), figures disputed by the council.
Sir Albert told the Post the council's collection rate was "one of the best in the country" and it had shown a preparedness to go through the courts to ensure funds came in.
The department also named Birmingham as one of the authorities with the highest level of reserves in the country, with £277 million held - again, hotly disputed by the authority.
Speaking in the House of Commons, Local Government Minister Kris Hopkins told MPs: "I am afraid that poor leadership in Birmingham and the fact that it has not collected some £100 million in council tax arrears may explain some of the issues it is facing.
"Stronger leadership and the ability to carry out the simple function of placing a charge on an individual and collecting it will assist it."
The council said its "rainy day fund" actually stands at just £26 million, going up £1.5 million every year.
In fact, the district auditor - the independent official responsible for ensuring the council is managing its finances properly - had warned for many years the council's reserves were too low.
Speaking in the House of Commons, Richard Burden MP (Lab Birmingham Northfield) said central government funding cuts imposed on Birmingham were three times the national average.
He said: "For the 2015-16 financial year, we in Birmingham are facing the largest cut in history, of £100 million, at the same time as we need to spend more money on child protection and social care.
"More than £250 million worth of savings are required by 2017-18, and the total between 2010 and 2018 will have been £821 million. We have been urged to spend more - and rightly so - on child protection and safeguarding but we face a Government who will the end while cutting the means to achieve precisely that."