Cool, that should work. It definitely gave me some peace of mind - you can even put the lock on if you are on a crowded subway or wherever, where someone might be able to open your bag while you are wearing it.
As for hostels:
I’ve never been to Brussels. I can only remember where I stayed in a few of the other cities - I guess the rest were just nondescript hostels!
Paris - the places in the Montremarte are the cheapest, but the one I stayed in was filthy. Can’t remember the name either.
Amsterdam - The Flying Pig. Pretty cool and fun place - lots of drug use, if that bothers you (not sure how to avoid that in Amsterdam though).
Krakow - Dizzy Daisy Downtown Hostel - the people here were super nice and let me sleep when I showed up off a night train at 4.30am, but didn’t charge me for that night at all. Nice hostel, good location, cheap as hell.
Budapest - there is a hostel called the Station Guesthouse that is the cheapest hostel in Budapest (or was) - don’t stay there! There is a reason it is so much cheaper than the others - you’ll never sleep with the noise of the trains!
Vienna - I second irishgrl for Wombat’s
Bern - Hotel Glocke Backpackers Bern was nice, although a bit noisy from the street IIRC. There are not very many hostels in Bern.
Personally I agree with Petrobey Mavromihalis to skip Bern and Vienna - both are nice enough, but not that exciting. I love Prague, and Zagreb is also a great suggestion, although I prefer Dubrovnik if you’re going to go to Croatia. You could always make the decision at the time - if you like Krakow and Budapest, you might like more Eastern cities. They are certainly a lot cheaper.
If you do go to Prague, I like Sir Toby’s Hostel - not far from downtown, but in a beautiful, safe, quiet neighbourhood.
If you go to Croatia I recommend taking a room in a private house if you feel brave - when you get off the bus or train there will be people there offering them - they usually hold up signs with a picture of a stick man sleeping on them. These rooms are cheap and comfortable, and give you a look into local life. It is a bit scary the first time you do it though!