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I think the whole month of August is vacation time for many Europeans and they like to get out of the cities and avoid the tourist madness. It may not be so bad now with the weak dollar.
The best trips to Europe we took was flying into a major city and using a Eurail pass (unlimited train travel) and making our own plans. Something like Amsterdam to Paris to Rome to Naples, Florence and Venice. A nice side trip from Naples is to take the ferry to the Isle of Capri and also visit the remains in Pompei. The train stations are usually located in the center of the cities which is usually where you want to be. We rented a car a couple of times but it is a pain to always have to find parking in the cities.
Spain is a beautiful country but probably requires all the vacation time itself but if you go there you may want to take the ferry to Morocco for a day trip. It is like going back 500 years in time. If you go to Germany or Austria then I would also try to take in Prague for a few days but be ready for an army of tourists.
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