It hasn't been a great year for European economies. Italy has slid back into a recession. German GDP contracted in the second quarter, and German finance minister Wolfgang Schaeuble reportedly said on Thursday that the Eurozone's strongest economy is likely to miss its 1.8 percent growth estimate this year. Across the Eurozone, zero growth was shown in the second quarter, and recent manufacturing data indicates that the third quarter may not be much better.
Still, these bad numbers haven't been too damaging for global risk assets—after all, they have clearly increased the European Central Bank's appetite to stimulate the economy. But there may be a limit to how bad Europe can get before bad news becomes bad news once again.
In fact, serious concerns about the Eurozone economy could be one reason why stocks didn't react too enthusiastically to the ECB's surprise Thursday announcement that it would cut rates and commence asset purchases.
The "aggressively dovish moves by the ECB are not being taken well. They're being seen as a sign that the fundamental growth in Europe—which seemed promising less than a year ago—doesn't have a chance and therefore the ECB has to keep papering over the problems," wrote strategist Michael Block of Rhino Trading Partners in a Friday note.
Judging by the muted, even skeptical market reaction to the ECB, investors "are certainly considering the notion that bad news is bad news," said Jim Iuorio of TJM Institutional Services. He added, however, that "I still think they're going to come to the conclusion that it's not. They're going to decide that more money in the system has to be a good thing."
Investors will get a better read on whether Europe is bouncing back in the week ahead. On Thursday, CPI data from Germany and France are released, giving a read on the pace of consumer inflation. And on Friday, investors will see industrial production numbers from all the members of the Eurozone. Meanwhile, ECB president Mario Draghi will deliver a speech in Milan on Thursday.
But Europe's problem may be political just as much as economic. On the back of the ECB's latest action, worries about whether the European Union itself can hold may crop up again. Draghi said on Thursday that some nations were opposed to the ECB actions, and it has been reported that German Bundesbank president Jens Weidmann voted against both the rate cut and the asset purchases. If tensions between Germany and the ECB fester, and the weaker Eurozone economies worsen, jitters about a EU breakup may return.
"It's a very, very tenuous union in many ways, and we see the conflict come to the forefront any time we have these issues," Boris Schlossberg of BK Asset Management said Thursday on CNBC's "Futures Now." German unease over ECB actions "could become a very, very serious problems."
Investors could be forgiven for having flashbacks to summer 2012, when fears of a Greek exit from the EU gripped investors, and concerns about a Spanish default reached a head. Markets in the U.S. reacted very negatively to the crisis, falling just about into correction territory.
That said, in 2012, European yields were in a very different place. Over the past two years, the yield on Spanish 10-year notes has fallen from over 7 percent to below 2 percent.
Thanks to the work of Draghi, "the risk premium on the euro and peripheral bond markets has become quite thin," commented Ken Dickson, the investment director for currencies at Standard Life Investments. "Some limited reversal is therefore possible, but our core view is that the ECB will not risk a return to the sovereign debt issues of the past."
And when it comes to the broader picture for European economies, investors might be unwise to discount the possibility that the Draghi's plan will actually work.
"I think it remains to be seen if this ECB action can change things on a sustained basis," but given the size of its program and the ECB's desire to grow its balance sheet appreciably, "overall, the ECB yesterday was a positive for European equities," wrote Rebecca Patterson, chief investment officer of Bessemer Trust.
Meanwhile, in the U.S. no great miracles are necessarily needed for the U.S. rally to continue.
"Better demand in Europe clearly helps US companies and stock sentiment," Patterson told CNBC.com. "But if Europe can muddle along—i.e., not deteriorate much further—I think the U.S. can continue to improve; that is, decouple."