British troops did land in Norway in real life, so if you see Commonwealth forces invade Norway then that would be a good thing, wouldn't it, rather than a bad thing? Besides, the threat of Norway being invaded forces the Player to keep several divisions in Norway. In one game I actually lost Norway to the English in 1942, and I had to pull 11 divisions off the Eastern Front to retake it.
Most threads relating to China on the AoD forum complain that Japan conquers China too easily when, in real life, WW2 in China turned into a stalemate. In the Third Reich Mod, Japan wins sometimes and sometimes stalemates, so it can go either way. Did I misunderstand your point?
Yes, the Italians did field several good divisions during the war. However, on the whole, the Italian military was pretty much worthless. If anything, the org and morale penalty should be even more harsh than it is in the Mod. For example, consider Operation Compass in North Africa from Dec 1940 - Feb 1941 when a small Allied force advanced 800 km, destroyed or captured about 400 tanks and 1290 artillery pieces, and captured 130,000 Libyan and Italian prisoners with the loss of only 494 dead. That inspired the quote 'Never in the course of human events have so many surrendered so much to so few.'