The Coming Week in Europe: German Data May Offer Clues to Euro's Direction

Manufacturing orders, the most forward-looking of next week's economic reports, will be released Monday. Signs of strength could boost the flagging euro.
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BERLIN -- Germany has taken much of the blame for the euro hitting parity with the U.S. dollar in recent days.

How fair it is to chalk up the euro's descent vs. the dollar this year to Germany's intervention-prone politicians or general economic weakness is, of course, subjective. However, accounting as it does for over one-third of the euro area's total output, Germany's influence on the new currency cannot be underestimated.

To be sure, the euro's future will remain tightly bound to the future economic prospects of Europe's largest economy. Since its inception in January, economists have been saying the euro will strengthen against the dollar as Europe's recovery picks up, but with the U.S. consistently cranking ahead at twice the growth rate, exactly the reverse has happened. The coming week may offer some answers as to whether the trend will continue with the release of a slew of German economic data.

First out of the gate on Monday will be the most forward-looking of the data,

manufacturing orders

for October. Orders are expected to resume their build after a drop in September helped unwind a massive rise in August. Those orders have yet to pop up in terms of output, but considering the lead time needed for some larger orders, they should soon start to trickle through to production.

Also, perhaps somewhat ironically, the renewed weakness of the euro should help send overseas orders through the roof, thereby strengthening the export-oriented German economy that has been weighing on the currency so much. That recovery should, in turn, help the euro appreciate again in value over time.

"The growth gap

with the U.S. is closing in euroland's favor," says Alison Cottrell, an economist with

PaineWebber International

in London. "The euro's present softness only helps this process along, giving a further boost to business confidence, growth and corporate earnings."

On Tuesday, figures for third-quarter

gross domestic product

won't offer much of a future look at German growth prospects, but they should confirm the worst is behind the world's third-largest economy. Also on Tuesday, the November

jobless report

should highlight the ongoing split in the German labor market, as Western unemployment falls and job prospects in the East continue to stagnate.

Finally, on Wednesday, the latest

industrial production

figures for October will round out the current picture of German economic health. As noted above, IP hasn't yet found a way to translate the surging orders into output, but an improving inventory situation should help things along.

It would be hard to imagine the euro will still be flirting with dollar parity, regardless of how well the U.S. economy is chugging along, if German production is clipping ahead come springtime. That is, unless the currency experiences a crisis in confidence attributable more to the continent's politicians and central bankers than to its economic fundamentals.