I have never rented a car in Europe, but from reading this forum and guidebooks I have learned about some related expenses that you may not be anticipating.
First, be sure you understand the insurance situation. Many people comment that (irrespective of what kind of coverage their US auto insurance may provide) they are most comfortable paying for the zero-deductible CDW as part of European rentals. That way they don't have to worry about real or alleged damage to the car. If something does happen, the rental company isn't going to charge a large deductible amount to their credit card and leave them to try to recover that cost from their insurance carrier. However, adding on that insurance can sharply increase the cost of the rental, and I'll bet your $50/week deal doesn't cover any extra insurance. I have no idea whether your insurance situation is such that you need to pony up for rental-car coverage in Europe, but many other people who technically don't need it have decided to buy it. The time to make that decision is when you're looking at comparative costs, not when you are standing jet-lagged at the rental counter.
Second, several countries (including Switzerland and Austria for sure) require a vignette for driving on some or all of their roads. Others have tolls. And of course gas is far more expensive in Europe.
ViaMichelin.com has a cost-estimator that makes an effort to include all the direct costs of driving a route you specify: gas, tolls, etc. (but not insurance). It would be worthwhile to rough out a possible itinerary, just as a starting point, and price out each leg to get an idea of what your trip might cost by car.
Re: Railpasses. Sad to say, the multi-country railpasses are rarely cost-effective, and certainly not for a trip like yours that covers a comparatively small geographic area (only northern Italy, only southern Germany). Sometimes there's a single-country pass that makes sense for a traveler covering a lot of ground in that country, but I don't think that's going to apply in your case.
But Germany has a lot of special deals, as Sam mentioned. When you have a moderately solid idea of where you want to base yourself and what side-trips you intend to take, there are people here who can help you figure out which of the special German transportation deals will be cheapest.
Just a general tip, and not just for Germany: When you want to visit smaller towns via public transportation (especially via bus), you'll generally find it easier if you're based in the same administrative area, because transportation links tend to be regional. So if you want to visit a bunch of towns in Lombardy, best not to try to do it from a hotel in Tuscany. It just so happens that--at least in Germany--the best transportation deals seem to be on trips made within an individual state, so such trips are cheaper as well as easier.