I think that we can safely say that the AI is now good enough to beat even the best human Ethiopia. Well done HOI4 Devs!
Challenge accepted.

I'm going to try again on Normal difficulty but may switch to recruit if that doesn't work.
The mutiny event affects everyone, but I'm not sure what the trigger is as I had so many:
- My stability started at 35%, and was at 40% when the Mutiny event popped up. And by the Laws of Paradox, Nation/Realm stability is paramount!
- All my divisions except my two elite units were understrength, but there really were only a few months where I had enough equipment for everyone so am not sure if that was a factor.
- My casualty list (about 65k) had just topped the total of my fielded manpower. I suspect Stability was the big factor but that was an interesting coincidence.
The AI is heaps better. Flipping lost 135,000 men to a massive AI encirclement. First time that's ever happened to me. The mutinies appear to effect every nation - I've just had them as Manchuko. I think it might be something to do with lack of stability/war support or something along those lines.
The Italian AI did seem to do a much better job of keeping units up to strength... usually. At one point their mountain division was a green unit at 20% strength but that appeared to be the exception.
A bigger factor I think is that mechanics were adjusted so foolish AI behavior is not so suicidal: In addition to casualties and equipment losses being less lopsided, the Italian General (Messe) picked up some incredible buffs when attacking, towards the end he was skill 5 but with a 35% attacking bonus. My general was also skill 5 but his attacking bonus was only 15% as he had always been defending. His defensive bonus was at least 25% and [EDIT: His defensive bonus was in fact 25%, same as his skill level], like other mechanics (Army Experience for one) may be driven by total combat width in action or the production value of equipment losses in battle.
[EDIT] I doublechecked the last save file, and those "Italian reinforcements" included at least four German Volunteer 9/3 Infantry divisions. I wondered why enemy soft attack and breakthrough had suddenly increased so much...
