Second the recommendation for the Eurail pass. The trains go EVERYWHERE. It's the best way to travel.

We actually skipped the hostels and found inexpensive hotels and pensiones all around. It really wasn't that costly.

And DO get off the beaten path. The big cities (Rome, Paris, etc) are cool but after a few of them they get a bit tiresome because, well, they're big cities.

In Italy try to get to the Cinqueterra. It's a well known travel destination outside of Florence but it's classic italian coastline and hill towns. Beautiful. If you hit Portugal, head to the south and the beaches. Cheap, good food, wine, and beautiful women. And many pink British people on vacation.