News of a pre-Christmas plunge in morale among German retailers on Thursday prompted renewed questions about the potential fallout from higher sales taxes and the European Central Bank's plan to raise interest rates.
Data from several German states showing inflation was easing off after months of soaring oil and energy prices added to the worries over the ECB's plan to make credit more expensive to tame inflation.
Germany's Ifo research institute said its overall business climate index dropped more than expected in November, to 97.8 from 98.8 in October, and markedly among retailers as shoppers get ready for the Christmas period.
That, combined with the inflation figures from the German regions, provoked further misgivings about ECB President Jean-Claude Trichet's announcement last week that the central bank was set to raise rates moderately.
"With inflation heading lower and the Eurozone recovery looking so lacklustre, the ECB is skating on thin ice looking to apply tougher rate policy over the next year," said David Brown, Chief European Economist at Bear Stearns.
All 63 economists polled by Reuters over the last three days predicted a small rise of a quarter of a percantage point in the ECB's key rate at a meeting on Thursdya or next week.
Helped by a weaker euro and lower oil prices, France fared better, with a November report showing business confidence at its highest in nine months.
But French Finance Minister Thierry Breton renewed warnings against hasty interest rate rises.
"I remain - like my European counterparts - not very convinced of the need for such an increase now," he told the French Senate. "I do not see any risk of a resurgence in inflation in France or in the eurozone."
Trichet says that interest rates of a historically low 2.0 percent have long been supportive of growth and the ECB wants to remove a bit of this stimulus to keep price rises under control, without copying the US Federal Reserve's serial rate rises.
Some economists said the prospect of ECB rate hikes as soon as next week may have been what dented morale in Germany, in addition to disappointment retailers feel about the new German coalition's plan to raise indirect sales tax, or VAT, in 2007.
Germany's Ifo institute noted that its overall monthly index of the business climate, based on a survey of about 7,000 firms, had slipped in November from a five-year high the month before.
Recovery was still on track in the largest European economy and elsewhere despite the reality check of the November survey, which shook the euro when the news got to financial markets.
Beyond the headline number from Ifo, economists blamed the drop in retailer confidence on plans by the new German left-right coalition for a three-percentage-point rise in value-added tax at the start of 2007 to help cut the country's budget deficit.
It was the first Ifo survey published since the coalition announced its plans formally at the start of November.
The prospect of the VAT rise may spur German households into accelerating big purchases in the second half of 2006 but hurt demand thereafter in a country where consumer spending has long been stagnant.
Belgium's leading indicator of economic prospects, issued on Wednesday and watched as a trend signal for wider Europe, was also dragged down by poor retail sector sentiment in November
Germany's major political parties agreed a coalition deal at the start of November which ended weeks of uncertainty in the wake of an inconclusive September 18 general election and created a team headed by conservative Angela Merkel, sworn in on Tuesday.