It's based on a model of absolute sovereignty as conceived by Bodin whereby the monarch's authority is not transferrable to the people or a government, so you're competing with internal factions distinct from the sovereign such as clergies, aristocracies, commons, etc. It's not meant to reflect westphalian sovereignty which is inclusive of the entire state system and thereby is defined by external factors as you say. There is some licence taken for the sake of gameplay. Political capital is descriptive but lacks the sense of ultimateness found in sovereignty.
Yup. I can buy that. Especially since the game begins before the treaties of Westphalia.