I'm not too sure Drusus. I often play boardgames and usually I do that. If I'm the strongest, I go against the second (the strongest behind me). If I'm not, I try to kill and absorb the weakest, to be stronger.
What you are saying works if the only victory condition is military conquest, but if you want to go for a Spell of Making or a Master Quest, you'll want to ally with the strongest player to make sure you're safe until you complete your objective. I don't know if this philosophy still applies, but I think Stardock goes with Drusus' idea, so the AIs will work to bring down the strongest player. I don't actually know what they did for FE, but this is how it works in GalCiv. Here's an article about it:
https://www.galciv1.com/encyclopedia.asp?action=showpage&page=https://www.galciv1.com/docs/criticalmass.html
The thing is that in GalCiv you could establish trade and pay tribute and improve your diplomacy skill to the point where even if you didn't have a serious military force, the other civilizations would leave you alone for the most part, except if there was some other factors, like lingering racial grudges etc.
This has to be implemented in Fallen Enchantress too, because otherwise diplomacy is next to useless as it is now. Everybody you meet will immediately declare war on you. Establishing trade routes should improve your relationship with other factions more, and paying tribute and signing NAPs should ENSURE peace for the duration of the pact, so the AI shouldn't break them. Declaring war on their enemies etc should really make a difference. There will of course be factors like different allegiance and leader personality which will impact relations.
I'm playing Caveman2Cosmos now for Civilization IV and it has brilliant diplomacy. Of course Civilization IV is a 8 years old game and had many expansions and patches, and the Caveman2Cosmos mod had more people working on it then Stardock has employees, but it shows that it can be done. I'm not saying I expect FE to get to that level, but at least to GalCiv standards. That being said, FE is still young, we'll see...