It is interesting about the battle difficulty. I dorecall posts when M2TW was first released around the fact that they had moved away from giving the AI combat bonuses on H and VH which is why I moved to the VH battles...

For the campaign difiiculty, one thing that might be worth noting, whatever difficulty you chose when the AI interacts with itself it dipomatically it does so at the normal difficulty level.

Finally I think the OP is spot on for the settings up to the 1.2 patch. But with that patch in place I have noticed far more reasonable behaviour from the AI while playing on Hard (I normally do H/VH) than before. For allies the relationship seems to move towards good/very good on it's own rather that normalizing constantly downward like previously...