i must say i don't really understand all this "there was no influence of nations, and nationalism in europe prior to 1789" thing. i just read cesar's galic wars and there he was describing clearly defined nations (tribes or call them how ever you want). group of people sharing common language customs, claiming teritory wich they consider they own, and so on. Such thing didn't just disapeared in medieval europe just becouse kingdoms where ruled by kings who had nothing against extending their rule over "national borders" creating multiethnical countries. I belive average medieval peasant was well avare to whitch nation he belongs to.
Many misunderstanding comes (imho) from the fact that nationality isnt fixed in stone or even in genes. nations change constantly evolve you might say. several nations can merge to create bigger one, or one nation can split in two or more smaller ones. and goverment and politics do play great role in this process.
it would be really shame to see all this left out in a eu3 (as it was mostly in eu2 when province culture was set in stone) specialy because period of the game is actualy time when modern european nations where formed. even in modern world this constant process of forming nations are visible. who can dispute that americans (usa americans) are not a nation, canadians are nation too, but if history wanted diferently and usa bought or conquered canada in 19th century today there would be no such thing as canadians (perhaps as geographical term but not as a nation). on the other hand we have basks (this is probably spelled wrong, but im talking about atletico bilbao fans

) who are ruled by spain for god knows how long and obviouosly they will never become spainrads, and remain basks forever.
I think nation building could be simulated in the game, but concept of all cultures are diferent should be canged drasticly off course and some other things should come in play such as race (important thing in nation building).
my sugestion would be creatin couple of "layers of culture" (i belive someone sugested same thing for religion). first layer could be 1)general people groups (indo european..) than 2)subfamily of a group (slavic, german, celts..) and 3) nation/tribe. this way you could say for instance (indo-european)-->(slavic)-->(croat) and (indo-european)-->(slavic)-->(serb ) can in right circumstances (living in same kingdom long enough, having same religion, being in geographical proximity) easily become (indo-european)-->(slavic)-->(yugoslav) or one nation assimilates another if it's in significant majority. but on the other hand it is much harder for (i think non indo europeans)--(xy)-->(basque) to assimilate in (indoeuropean)--..-->(spanish). there are offcoure lot's of bonuses and minuses that would determine wheter "merge" or assimilation takes place. nationonal identity is stronger if national state exist, religion, political preassure and so on. austria for example (i-e)-->(german)-->(aus) can hardly convert (i-e)-->(slavic)-->(czech) becouse they are diferent in 2. category not to mention ugric maygars. thing would work other way around. if there are two rival countries big enough and so on.. with same state or major
culture, (german) both in brandenbourg and in austria. they become separate distinguish nations austrians and germans. this would mean that it is possible to create pan germanic empire with strong united german nation from baltic to balkan all feelin as member of one culture/nation, but also that germans could splitt up to several separated nations prussians, bavarians and austrians for example.
There should be perhaps DP slider that determens how do you treat diferent ethnic groups in your kingdom. if you prefer one and look down on another than you will either make them rebell, loose significance (less income in that province but less impact they have on whole empire?) or assimilate them, treat everyone as equalls and you get a chance to create new nation. people fell good in their country/kingdom they are loyal to it's king so they start feeling like members of one the same group, that is how new nation is born. for instance if all ethnic groups in austrian empire felt like equals, instead of beeing opresed by state favored german culture it is not so unlikely that over time they would developed higher level of cohesion witch could led to creating new austrian nation. so you would have provinces with (german)-->(austrian), (slavic)-->(austrian), (ugric)-->(austrian) culture, effectivly all beeing same culture with all bonuses that give you. offcourse that would be a lengty proces and player should have long term plan wheter it pays off. it could also affact irational expanding whitch is never a bad thing . not all provinces would have lowest 3 category stricly defined, so there could be lots of generic (slavic), (celtic).. provinces who are just waiting for stronger coutry (player) to give them more specific culture belonging.