Historical mode means that the AI will take the historical decision in pre-programmed events as they come up, and pursue their national focuses in a historical order. So AI Germany will demand Sudentenland at around the historical date, and AI Britain and AI France will accept it.
It doesn’t really prevent the game from going off the rails though. On fairly common scenario is that Germany’s initial wars don’t go as well for them as historically, but they still end up declaring additional wars on the original timetable, further multiplying their enemies. That’s one of the major outstanding problems. All of the major problems in the game seem to come from the AI lacking much of any strategic sense.
I haven’t seen much of a problem with AI minor powers trying to take over the world, though crazy world conquests are definitely possible in the player’s hands.