If I only had two weeks in Europe....
Iceland for 2 days
fly to Berlin for 3 days
Drive to Dresden for a day
train to Prague for 2 days
Fly to Barcelona for 3 days
Fly to Paris for 3 days
fly home from Paris
You could easily sub an Italian city for Barcelona.
Iceland is the nicest country I've ever seen (out of about 30 or so). Most amazing scenery. Don't pass it up, plus you can fly there quite cheap on iceland air.
Berlin is a great world city and a major part of modern history. Really cool city, very artsy but not pretentious (like Paris), and great food. Plus it's very cheap for a western european country.
Prague is worth seeing for a taste of Eastern Europe, and the city is very well preserved architecturally. It's cheap and there is no shortage of fun to be had in terms of bars and drinking. Just be wary as there are plenty of tourist ripoffs too. If you can, go to Krakow instead of Prague - less tourists, less ripoffs, plenty of sights to see.
Barcelona or another Spanish or Italian city would be good to see for a taste of Southern Europe. It feels very different than the north or West in every way. Lisbon is a nice city, though it's out of the way.
Paris is a bit of a must see. I was very skeptical on how nice it could be and figured it was over-hyped. I was very much wrong. It's a beautiful city in every way, but don't spend your time camped out waiting for museums. Wander the parks, sip coffee and watch people go by, eat great food. It's the quintessential European experience.
For fly vs train, I used a 6 hour rule. If you could train in under 6 hours, take a train (or bus). Airports are typically an hour or more from the city centre, so a one hours flight is a minimum 4 hour trip (1 hour to airport, arrive hour before flight, 1 hour flight, one more hour to new city). Plus, if you have a large pack and have to check your bags, those cheap flights get pricey quickly. Trains are easy and direct and scenic. Driving in Western Europe is great, especially Germany. Car rental is cheap too. Don't bother trying to drive in Eastern or Southern Europe unless you want to experience chaos like no other!
Lastly - accommodations. Don't assume hosteling is cheaper. When I went with my wife we found that you could usually find well rated budget hotel for less than a hostel. These would be cleaner, quieter and more private than most hostels. Hostels are only cheap if you want to stay in a dorm with a bunch of other people, but if you want a private room + private bathroom, budget hotels are less money. i used booking.com for a lot of hotel bookings. Another great alternative is airbnb.com which allows you to book rooms or full houses/apartments direct from locals. Had great luck using this and you can often stay in less toursity places with great local flavour.
Good luck planning and have a great time!
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