Amid a sea of gloomy economic data and rising tension in the euro zone, the next few months could prove decisive for whether the euro zone economy sinks or swims, analysts told CNBC on Friday.
Sean Corrigan, chief investment strategist at Diapason Commodities Management told CNBC that there had been "a disconnect" in European financial markets ever since the European Central Bank chief Mario Draghi had made his "whatever it takes" to save the euro zone statement almost a year ago.
"Markets have been happy to run with this confidence trick but Spain gets worse week by week with its property market down 35 percent from the top, joblessness gets worse every week and the Greeks have just shut down their TV services because they can't pay for it." Corrigan said.
According to him, the fact that peripheral countries have eased up on cutting their budget deficits could also renew tensions. On Thursday, Italy's economy minister said that although a deeper-than-expected recession was hurting public finances, Italy would not announce further fiscal tightening.
Even countries that have stuck rigidly to austerity measures have not been given much hope for a rapid recovery. The International Monetary Fund (IMF) said on Thursday that the outlook for Portugal's public debt was "very fragile", despite the country meeting the latest targets of its 78 billion euro ($104.5 billion) bailout.
The IMF said Portugal's public debt is now expected to peak close to 124 percent of GDP in 2014, two percentage points higher than it last forecast. Heavily indebted Greece, meanwhile, was downgraded to an emerging market economy this week by the emerging markets index MSCI this week.
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Still, one factor that will help keep things in check, according to Corrigan, was that policymakers will do everything possible to keep the zone safe until after the German elections in September.
Thanos Vamvikidis, head of European G10 forex strategy at Bank of America Merrill Lynch told CNBC that the success of fiscal consolidation within the euro zone depended on the quality rather than the quantity of cuts.
"The whole euro zone periphery has debt sustainability problems and they do need to continue with fiscal consolidation. But rather than implementing horizontal spending cuts and tax increases, governments need to implementing real public reforms to the labor market [and other sectors]."
Despite unemployment in the euro zone reaching a record high as high of 12.2 percent in May and slowing growth, peripheral bond markets in Europe have displayed an "uneasy calm" over the last few months.
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Although ten-year peripheral bond yields rose sharply on Wednesday, it was due to fears that the Federal Reserve could start tapering its bond buying program rather than underlying fundamentals in the euro zone.
Vamvikidis said data in the second half would be a key signal of the euro zone recovery.
"If the growth data disappoints in the latter half of this year then that could be very important for determining market sentiment towards the euro zone."
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But Ian Bremmer, president of the global political risk consultancy Eurasia Group is pessimistic about the prospects of a turnaround.
"Certainly, some of these countries have hit the bottom but there's no reason why you're going to see major economic growth in any of these European countries soon," he said.
Second quarter GDP data from the euro zone is due in August and the next release of purchasing manager's index (PMI) data is due on June 20.
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The chief international economist at Barclays said he was "pretty confident" that growth would pick up in the euro zone in the second quarter, and that Draghi's "whatever it takes" motto was still relevant.
"I think the euro zone has learned a lot from previous crises and there will be a great concern to avoid the depths of the crisis that we've seen," Julian Callow told CNBC on Friday. "There is a risk of tension and markets are certainly going to be very thin and illiquid over summer so there's a danger that market sentiment could get knocked, but overall Europe is in a much more efficient crisis management mode so you can expect the firefighting to come out if the conditions deteriorate very seriously from here."
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt