mysql database not rendering german character correctly - mysql

Question

Update:
it turns out this is not directly related to the DB server itself, but the clients encoding. If the client uses encoding utf8, the german character is rendered incorrectly. But if the client uses encoding cp850, then the german character is rendered correctly. But I need to use utf8 since there might be other class of characters that the app needs to deal with. what should I do?
Original:
I have two database servers, viewing from the same mysql cient, server1 is rendering the german characters correctly, server2 is not. the following are the differences. But I'm baffled since server2 uses utf8 more. What could be the cause of this?
server1's encodings:
mysql> SHOW VARIABLES LIKE "character\_set\_database";
+------------------------+--------+
| Variable_name | Value |
+------------------------+--------+
| character_set_database | latin1 |
+------------------------+--------+
1 row in set (0.00 sec)
mysql> SHOW VARIABLES LIKE 'character\_set\_%';
+--------------------------+--------+
| Variable_name | Value |
+--------------------------+--------+
| character_set_client | cp850 |
| character_set_connection | cp850 |
| character_set_database | latin1 |
| character_set_filesystem | binary |
| character_set_results | cp850 |
| character_set_server | latin1 |
| character_set_system | utf8 |
+--------------------------+--------+
server2
mysql> SHOW VARIABLES LIKE 'character\_set\_%';
+--------------------------+--------+
| Variable_name | Value |
+--------------------------+--------+
| character_set_client | utf8 |
| character_set_connection | utf8 |
| character_set_database | utf8 |
| character_set_filesystem | binary |
| character_set_results | utf8 |
| character_set_server | utf8 |
| character_set_system | utf8 |
+--------------------------+--------+
7 rows in set (0.01 sec)
mysql> SHOW VARIABLES LIKE "character\_set\_database";
+------------------------+-------+
| Variable_name | Value |
+------------------------+-------+
| character_set_database | utf8 |
+------------------------+-------+
1 row in set (0.00 sec)