I used a 40 l backpack for a 4 weeks Interailing trip through the UK and Ireland. Personally, I think the size is fine, if you are willing to take a smaller bag as a regular daypack/flight carry-on with you.
It is absolutely no problem to wash your things in hostels, so you can bring enough clothes for about a week and not more. A jeans, zip-off pants, shorts (doubling as swimming trunks), a few t-shirts and a sweater along with a light windbreaker, sneakers and flip-flops don't take up so much space that you need to buy a completely new pack. A very small towel will do its job just as nicely as a large one.
Also if you are going by train, consider that a larger pack than what you have now will not fit into a lot of the luggage racks in European trains.