From: Dallas, Texas
I have come to realize the German AI is at its worst when it thinks it has the advantage strategically (see the numbers at the top while it is making its move), but locally it does not. It will refuse to retreat (I assume because it has calculated it has the advantage), regardless of the situation. Especially in situations where it could use the "move one hex rule" and have units escape (at least, delay death a turn). After you kill a slew of units, then its calculation shows it has a clear disadvantage- and it suddenly starts playing better (not great mind you but better).
With that said, I think the AI is pretty good, and whoever programmed it is a genius (Gary, whoever). Remember, this is not something that millions of dollars were spent developing- its an $80 game.
Oh and to address your game issues: I have seen the same behavior in the AI- building an impenetrable fortress of units up north but leaving the south scarcely defended (which needs more, not less). Plus you spent half the game kicking its ass at Normal, so it was already weakened more than it really should have been- and you were stronger than you should have been (less manpower centers/armaments/casualties taken than if you had set everything on AI 110% and you 100% (or you 90%).