It made no sense for England not to fight you. His other alleys were closed. Why in the world would he move on Austria when he could simply go after you? I have never seen an England make a strong move against Austria, and the only typically Austrian center I consistently see a large England occupy is Rumania, but that usually won't last long.
You should have had those two fleets back in the first place, and if Italy continues to be a bother, then so be it, you have no choice but to use them, but you still stop him short in Marseilles/Spain/MAO. A competent Italy (which you didn't have, but you have to assume you do during the game) would stop there and go elsewhere, and it is clear from the beginning that his intention was to go east. You didn't have to engage him in that useless fight or stay on him that entire time, and had you pulled back when it was clear you weren't getting Tunis rather than when another threat to you popped up, you should have preeminently been at the very least ready to defend against England if not attacking him yourself, which, given that the channel remained open, would have been fairly easy to do. That would have given you the upper hand assuming you timed it right, but my entire point isn't that you could have attacked him but that you could have easily been much, much more prepared to defend.
Italy went for Iberia, which makes some sense. It's an easy stalemate if he beats England to it, and that would have ended the game. You would have to retaliate to survive, though, and nobody will blame you for trying to do that.