The German figures look excellent. Unemployment is down, output and consumer confidence are up and this year's official growth estimates are about to be lifted from their anemic 1.4 percent to 3 percent. This is a success story.

But turn to the respected Ifo Business Climate Index and it looks as though German industrial output is about to plunge sharply over the coming year, taking the economy down with it.

The answer to this puzzle is that Germany has a very unusual economy. It is massively geared toward exporting its products abroad, indeed exports account for 34 percent of gross domestic product, an extraordinarily high proportion. The latest Organization for Economic Co-operation and Development figures report that exports account for a mere 7.5 percent of GDP in the United States, 11.4 percent in Japan, 19 percent in Britain and 25 percent in China.

And since the big export markets of the United States and the rest of Europe are stagnant or stuck in slow growth, the slowing of the Chinese economy hits Germany hard. Exports are fading. They dropped 1.6 percent in July and another half a percent in August, according to the Federal Statistical Office in Wiesbaden. (They were still 27 percent better in August than they were the same month a year ago.)

The boom that Germany enjoyed in the first six months of this year was driven mainly by companies restocking after slashing inventories in the slump. But that restocking surge is running its course and deficit spending is being cut back in China and in Europe and the effects of U.S. President Barack Obama's $800 billion stimulus package are fast wearing off.

But if the Ifo forecast is correct (and it usually is very reliable), Europe is in for a grim future since the Germans have been carrying the rest of the continent's economy almost single-handed, with a little help from the Scandinavians.

In a recent paper, titled "Europe's Long-Term Growth Prospects," Uri Dadush of the Carnegie Endowment (and formerly a top economist at the World Bank) notes that the European Union is responsible for 35 percent of world trade and 40 percent of outward foreign direct investment. As a result, economic weakness in Europe "is unlikely to be contained in the region," he notes.

But assessing the EU economy depends on your point of view and on the exchange rate at the time of measurement. The current official size of the EU's GDP in 2009 is $16.5 trillion, according to the International Monetary Fund, or a much lower $14.25 trillion, according to the World Bank.

The difference reflects the changing exchange rate. And since the Chinese keep their exchange rate closely linked to the dollar, a weakening dollar also means the European exports become more expensive in both China and the United States while Chinese and U.S. exports to Europe become cheaper. This is going to get worse, since the U.S. Federal Reserve seems almost certain to indulge in more quantitative easing, which, in effect, prints more money, and this encourages the dollar to fall further in the currency markets.

A similar effect is under way in Japan, so to try to weaken the yen against the Chinese yuan, the Japanese have to sell yen and buy dollars. (Japan cannot sell the Chinese currency directly, since it isn't fully convertible, so they trade against the dollar instead.) But America's QE policy will drive the dollar down further, strengthening the yen and thus spurring the Japanese to buy even more dollars.

This is a nightmarish process, which explains why there was so much talk of "currency wars" ahead of the weekend's IMF-World Bank meetings in Washington and so little progress. And it also explains why there is now so much pressure on China from the United States and Japan and Europe to let its exchange rate move to reasonable levels.

As Fred Bergsten, a former U.S. Treasury official and the head of the prestigious Peter G. Peterson Institute for International Economics in Washington put it last week: "China has intervened in the foreign exchange markets by an average of $1 billion a day for the last five years, buying dollars to keep them expensive and selling (yuan) to keep them cheap, building a gigantic reserve of $2.5 trillion in the process. Largely as a result, the (yuan) is undervalued by at least 20 percent relative to economic fundamentals. The largest trading country in the world is therefore subsidizing all exports by at least 20 percent and imposing an additional tariff of at least 20 percent on all imports."

The political pressure is swelling fast for the West's governments to do something about China's stubborn reluctance to revalue, despite the significant remark last week by Chinese Premier Wen Jiabao that it could produce "social and economic turbulence" in his country.

So far, the Big Three Western economies of the United States, Japan and Europe haven't really coordinated their policies toward China's currency manipulation. German businesses in particular have been doing too well out of exporting to China for the government to get tough. But if the gloomy Ifo forecast is right, the mood in Germany will change fast.

The Chinese government, already resentful over the award of the Nobel Peace Prize to jailed dissident Liu Xiaobo, is about to face unprecedented international pressure over its currency, just in time for next month's Group of 20 summit in South Korea. This is going to get rough.

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