EURO ZONE uncertainty has arrived in Germany, where the closely watched Ifo index of business confidence has dropped to a two-year low.

The second consecutive monthly drop marks the latest but not last bit of bad news, with economists in agreement that Europe’s economic engine is starting to stutter ahead of a difficult 2013.

Ifo president Hans-Werner Sinn said data was particularly bleak in Germany’s all-important manufacturing sector.

“The business climate index in manufacturing dropped sharply,” wrote Prof Sinn in a statement.

The labour market remains at its strongest in two decades but a prolonged drop in demand from Germany’s euro zone customers – destination for 60 per cent of all exports – could mean bad news for manufacturing sector workers.

“The German economy is clearly slowing down and a contraction of the economy in the second quarter looks possible,” wrote ING economist Carsten Brzeski.

The business survey of 3,000 managers across all economic sectors dropped to 105.3 in June from 106.9 in May. It now stands at its lowest level since March 2010.

On Tuesday, the ZEW survey of financial market participants recorded its sharpest drop in nearly 14 years. Purchasing managers warned on Thursday that the economy will struggle this quarter with manufacturing beginning to shrink.

Analysts are divided over whether a feeling of economic vulnerability in Germany would ease the path to crisis-fighting measures – or block the path entirely.

“Until now there was no palpable crisis in Germany; unemployment was low, so chancellor Angela Merkel hasn’t had to justify her [crisis] politics directly,” said Dr Ferdinand Fichtner, head of forecasting and economic policy at the DIW economic institute.

He expects a sizeable drop-off in all economic indicators for next year.

“A rude awakening is coming for Germany,” he said.

“As soon as the euro crisis hits the job markets here – and it will – the feeling that the euro crisis is costing jobs will push acceptance of the currency and bailouts into the cellar.”