We have to frame French reactions in reference. The Popular Front was already very controversial at home, TTL international events are going to strenghten the influence and appeal of right-wing parties more and more, with the unquestionable success of appeasement towards Germany (it returned to democracy, scaled down the pace of rearmament, gave guarantees on A-L, gave a sensible peace to Poland after victory, and made moves at reconciliation with Czechoslovakia and the West) and increasing signs of Soviet aggressive expansionism. In this framework, a political right-wing shift in France is quite likely (of course, as soon as France declares war to Soviet Russia, the PCF shall be outlawed and its sympathizers interned and despised as fifth-columnists). And it is also very likely that they would apply the appeasement strategy to Italy about Yugoslavia, too: both to "tame" Italy by allowing it to satisfy reasonable irredentistic claims and a "safe" sphere of influence, and to secure it as a very valuable (TTL Italy was no OTL pushover, thanks to two extra years of preparation and the lessons of the Third Balkan War) ally against Soviet expansionism. Given Mussolini's mentality, the gamble proves wholly correct.
In that context it could make sense fearing a Soviet menace. OTOH a right wing gov't might take the opportunity to push back against Italian aggression and open claims over French territory (OTL). Of course ITTL the USSR has invaded Romania, so there's a supportable reason to look the other way. Note also I never said France would automatically oppose Italy by force, just that some justification for their non-involvement was needed. You make a plausible justification here. Cheers!
Well, it is impossible for a Balkan overlord to make all nationalities content at once. At least leaving Kosovo to Serbia may make Serbs sufficiently pliable to Italian hegemony, and quelling Albanian insugency is less of an headache than quelling a Serbian one, as numbers and spread in the region go.
Certainly in a good position to given proximity (unlike Ethiopia which has wicked supply lines). Pressure on the Serbs to restrain the Albs could go a long way unless some outside force (like the USSR during the war) is propping them up.
True, but the Libyans have never been that numerous. I think it is feasible for the Italians to "dump" all of most of them in Niger or Chad (messing somewhat with EEDA colonial turf, but Sahel is not exactly at the top of EEDA strategic priorities) or stake out a low-value part of desertic Libya as a Bantustan-like "reservation" for them. Exiled Libyans may stil stage some insurgency from there, but it is not going to be anywhere as successful as if they had been free to roam the coutnry. Fascist Italy already used the large-scale native-concentration strategy to quell nationalist insurgency in the 1920s. It is wholly plausible they go all the way to secure their assimilation of the "Fourth Shore".
Brutal counterinsurgency, as you mention, was a Fascist specialty, though such heavy-handed matters only lead to the temporary suspension of hostilities and don't help the underlying resentment, typically making it worse. You'd need some form of "carrot" with the "stick" for any long-term solution. Balbo as Gov was fairly good in this area and always pushed for citizenship and Mussie set himself up as "defender of Islam", so some "separate but equal" semi-integration is possible short-term. How much of the population buys into it depends on a lot. And SbE is, of course, bullshit so there's real lingering resentment potential here. And as OTL has shown it doesn't take large numbers to support terrorism, particularly with hostile Islamisist neighbors (still quite possible since OTL's post-colonial problems will still be present ATL) and a porous desert border. Eventually Italy will need to improve the lot and treatment of the Libyans substantially if there's to be any hope of avoiding some measure of protracted conflict, even if only a violent terrorist minority.