It was my understanding that there were Vicky style "states" made up of many provinces. For example, in the D-Day scenario screenshot, you'll notice that 2 Allied Air Wings are assigned to fly Air Superiority and Interdiction over Normandy. Now take a look at the province names... there is no Normandy. My bet is that Normandy is a region or "state" if you will. Additionally, notice that 38 Group is flying Air Superiority over all of Netherlands... not just one of its provinces. Basically, this means that your aircraft aren't flying over just one province but over a region. Now if Johan and team are smart enough to do that to simplify air combat, then they surely did something similar for province management.
All in all, you can have your cake and eat it too. Smaller provinces for more interesting ground warfare (i.e. flanking maneuvers, quicker move times, etc.) while not increasing micromanagement on the domestic / production side of things because there are fewer "states" (where I assume you'd manage such things) than provinces (where battles are fought).