The "capital" in AoW 2 was usually also your best city because with your wizard sitting in it you'd build the casting chamber and likely a teleportation gate. That's what made losing it a big deal, rather then some special "capital" property. Civ 4 was like that too, since the palace just gets rebuilt somewhere else but capital starting locations were generally high yield. They made it matter more in Civ 5 because you lose your diplomacy victory vote if your capital is conquered (and then you want to go get it back).

In the real world the blow of losing the capital comes from also losing the infrastructure. A lot of the bureaucracy and machinery of government is in the capital and can't simply be packed up and moved easily. Losing it deals an actual blow to your organization (on top of the psychological one of losing your capital).

I think capitals should be basically unconquerable until the very endgame. 

See Disciples, Tolkien, Berlin, Moscow.

I recently came up with a way to allow players to sacrifice conventional warfare in exchange for one very powerful city:

https://forums.elementalgame.com/411190

The short answer is a single building that is available early on that will give the player an invincible defense, for one city, until very late in the game. On a small map I would think the game would be more balanced if taking capitals was more difficult. I mean after you have two capitals you can usually stomp other Sovereigns on a small map (based on what I know from EWoM and other games like it). You would be giving up hopes of having a professional military, but as long as your Sovereign stays inside, you stay in the game and can focus on magic and questing.

I loved setting up a defense around the capitals in Disciples. Once every few turns the enemy would cast a spell and make a breakout attempt. I would have to quell their attacks, which prevented me from steamrolling over the other players. By the endgame I could send high level units with potions and enchantments over to crush them once and for all, but they were often able to regain power a few times throughout the game. That is how I want to shape occupation in FE. 

Of course there are plenty of other ways to build a strategy, but this adds important choices to the game. 

There should be a tech called Exit Strategy so we can send it to Congress. 

P.S. Napoleon successfully conquered Moscow, though it was abandoned and ablaze when he got there. 

I am dead set against any 'invincible defense' or anything else like that. Quite frankly, it seems ridiculous to me and completely artificial. If a player wants to make one mega-city, that should be a gameplay choice, with advantages and repercussions, all based on the rules of the game world.

I think a Capital should be important and matter to gameplay. But there are different examples of historical capitals, and their importance can vary. Look at the importance of Washington D.C. in the War of 1812 (as Americans call it). It was a fairly small, recently built city, and the British burned parts of it down. No big deal though because it was only recently established and wasn't important economically or for anything other than politics and symbolism. Now imagine someone doing that to D.C. today.

I don't think a capital is really a fixed thing in the early days of a nations development but more something that gradually evolves. I don't think there are many nations where the "starting" cities actually end up as their capital. More often then not other political or economical reasons decide where eventually a nations capital will be and also the influence which it has will develop over time

There for I don't think your Capital should be fixed to your starting city. I rather see it tied to a city improvement like the palace in Civ 4 which you can move towards another city if you want. This "palace improment" should also lead to more city improvments which depending on your tech level or empire size will allow you to specialize this city more and more into the capital of your nation. If you relocate (or when forced to relocate due to the loss of this city) your palace you will then have to rebuild all these extra improments. This will make it so that relocating your capital is relatively easy early in the game when your nation is still being established  while making it it less desirable to relocate it later in the game.