By Jeremy Gaunt
LONDON (Reuters) - The euro zone and its constituent parts will report fourth quarter economic growth numbers at the end of the week, offering policy makers at the European Central Bank a needed snapshot of the bloc's underlying strength.
Recent evidence has been mixed. There has been general improvement but a growing disparity between Germany and France, the currency union's largest economies.
Reuters polls suggest euro zone GDP will come in at 0.2 percent quarter on quarter for a year-on-year increase of just 0.4 percent. Germany's projected 0.3 percent quarterly rise, however, would translate to a relatively strong 1.3 percent for the year.
"The euro zone's economic outlook is slowly improving with even the likes of Greece showing signs that the worst is over," Northern Trust wrote in a note. "However, Europe's economic fundamentals are fragile, with deep divisions in performance among nations."
The ECB sat on its hands last week but gave a fairly clear steer that action could be taken next month if new internal forecasts show a further deterioration in inflation - falling so low as to trigger some concerns about deflation - and growth.
Bank President Mario Draghi pointedly flagged the Q4 gross domestic product data as crucial to the bank's thinking.
But what to do? A small interest rate cut from 0.25 percent to somewhere just above zero is hardly going to be a game changer and the ECB has already said it won't prime banks with long-term cheap money again unless they commit to lend into the real economy.
Bank stress tests looming to check on the stability of the financial system. Those same banks are also being told to deleverage and build up capital.
So while a case can be made for more cheap long-term loans, or LTROs, if banks do commit to pass the money on to businesses, it would not be straightforward for them.
The ECB has discussed ceasing to soak up money it spent buying sovereign bonds during the euro zone's debt crisis. Ending such "sterilisation" would inject about 175 billion euros of liquidity into the financial system. That would ease strains in euro zone money markets but probably do little to boost inflation, which the central bank wants.
That leaves printing money, or "quantitative easing", one of the ECB's last unbroken taboos. It is a long way off if it comes at all. But as Japan has shown, it's one of the few levers that could get prices rising again.
Another big set piece during the week is the Bank of England's quarterly inflation report.
All eyes will be on Governor Mark Carney and his ability to persuade markets and British people and companies that interest rates won't rise soon.
He is expected to give some indication about what path "forward guidance" - the expectations of what will happen - will take after the UK unemployment rate shot down to his trigger point for potential rate rises in months, rather than the years he expected it to take.
The Bank is likely to be less specific than before, and may introduce something like the U.S. Federal Reserve's system of tracking the change views of individual policymakers. But an actual rate hike remains a long way off.
Italy, meanwhile, is braced for a credit rating review from Moody's on Friday. The agency has a Baa2 rating - two notches above junk -- with a negative outlook so there could be some risk of a downgrade although recent data suggest the economy could have grown in the last quarter of 2013 for the first time since mid-2011.
Any data or set-piece economic event during the week will fade in importance, however, if the rout in emerging markets continues.
Central banks in countries as diverse as Turkey, India, and Hungary have been struggling to contain huge investment outflows that have knocked their currencies down.
The flip side is that developed markets are being threatened by imported disinflation from cheaper imports and their exporters risk becoming uncompetitive.
"Developments in global money and financial market conditions and related uncertainties, notably in the emerging market economies, may have the potential to negatively affect (euro zone) economic conditions," the ECB's Draghi said last week.
The drive for much of the emerging currency flight has been concern about slowing growth in China and the U.S. Fed's withdrawal of monetary stimulus based on an improving economy.
China reports import and export data in the coming week, and the United States reports industrial and manufacturing output, all of which should go to the heart of the twin drivers.
But last Friday's robust U.S. jobs data made it unlikely that the Fed would change its stimulus-tapering plans - to the chagrin of some emerging markets.
(This story has been refiled to fix typos in paragraph three)
(Additional reporting by Mike Peacock; Editing by Louise Heavens)