I'm reluctant to do it in exactly that way, at least without a map change or so - Wood Elves are then left with nobody to fight!
A lot of Bretonnians ARE pretty scared of the forests and a lot of Wood Elves will happily shoot any outsider who comes in - the Dwarfs of Karak Norn have had caravans ripped to shreds a fair few times in the rulebook fluff. It might be worth looking at re-routing the Elf to Empire pass down towards Skavenblight on the map, which would give the WEs a good scrap against the rats early on if the player wanted to go all good-guy style.
Dwarfs/Empire and Brets/Empire I agree more on, there's a good case to be made that they're generally each other's trusted allies. I'd like to see if it can be done within the diplomacy system by setting them to just generally like one another, and if it can't then I agree resorting to a script would be a good call.
Part of the issue of course is that a lot of Warhammer fluff is difficult to simulate - the Skaven under-Empire and random undead/chaos hordes appearing count for a lot of the fighting that goes on, but it's relatively hard to get that into the RTW engine (though I'd like to do more with rebels ideally for the next release, though all this of course depends on that horrible commodity known as time).
Do either of you think that a pass from the WE lands down to Skavenblight sounds a good idea?