Why doesnt dipomacy work?

[Empirate]

For me, diplomacy seems to work just fine, with one exception: It's not very transparent, although better than Rome.
As for allied armies camping in your terrain: I (English, H/H) was awed by the way I felt threatened when my Milanese allies moved first one, then another high quality stack into southern France. I had just cleared out the French, taking Marseille, their last settlement. The Milanese had driven the Venetians out of Venice and the HRE out of Bologna, the Sicilians being very strong and cozy with the Pope. The Milanese actually sent a diplomat to negotiate an end of our alliance, their priority being "war". I declined and even sent them home with monetary gifts, as well as a princess. Still, having one of the most powerful militaries in the world, and no other easy route of expansion, they sent those two armies over into my territory. I assembled a stack of high quality troops, led by a six-star prince, and just kept it near them. I always sent that army right into the red zone of control of the bigger Milanese armies, and also kept a spy near the other one. The wandered about a little, only a few squares per turn, whereas at first they had marched directly at Marseille and Dijon at top speed. Then, after five or six turns, they decided to leave and try their luck elsewhere. They've never bothered me since, but I keep a sharp eye on my southeastern border now (towers and spies).
This might be a glitch, but I saw a danger, reacted to it in an intuitive way, and this solved the problem in exactly the way I wanted it to.
On a different note, I have been at war with the Danes for decades now, and only one big battle and one siege ever happened. Other than that, it's been a staredown. We both have very high relations with the pope, and it seems, both sides are trying hard not to risk too much there. Even their fleets seem to try to avoid an engagement.

EDIT: I just remembered one thing I don't like about the diplomacy: The AI easily gives up much you would have to fight long for otherwise, at least on H difficulty. The Spanish have just given me two settlements (one of them a heavily defended citadel at Pamplona) just for a ceasefire after I wiped out 2500 of their men in the field. Earlier, the Scots were so keen on cancelling our alliance that they gave me Oslo. A few turns later (they had, predictably, attacked and been beaten bloodily and repeatedly), they sued for peace. I offered them a new alliance if they gave me Brugges, which they happily accepted. I had gotten two settlements, one of them too far away for my inferior fleets to reach, in exchange for nothing at all. Well, I did bruise their field armies, but their situation wasn't that bad!