Shouldn't Venice be able to use its massive navy to keep Austria out of the city? I would hope the AI knows that.
But that's just not what happened historically. Venice defended its capital with its navy sure, but in the Renaissance it was always expanding its land based holdings around Venice and held onto them right until the Republic's dissolution and that area remains a form of Greater Venice in today's modern Italian Republic. Venice almost completely collapsed in the War of the League of Cambrai, but it was fighting an alliance of the Pope, France and Austria on land and despite serious losses it managed to survive until the alliance collapsed first. Venice in EU3 can't even fight Austria evenly on land and has to hide in its capital with boats, this is inaccurate when the historical Austria needed allies and even then failed to rest the Po valley from Venice and instead decided that destroying Venice wasn't even in their best interest.
You can't have a League of Cambrai situation in EU because Venice just isn't a strong enough land power to ever need that kind of a coalition to stop it and Austria always puts down Venice's land expansion ambitions because of its over-powered army and completely achronological mission.
http://en.wikipedia.org/wiki/Veneto
Venice is not just a city on some islands, its the capital of one of Italy's full sized regions. The 'we can always defend this island' model in EU is just wrong.