If the Baron can commit to counterfactually doing Z, then he never has to do Z, so it doesn't matter how horrible the consequences of Z are to himself.

This is true, but you've neutered the prisoner's dilemma. One of the central problems one faces in game theory is that it is extremely hard to credibly precommit to do something that you'd clearly rather not do. Your point is valid, but you've assumed away almost all of the difficult parts of the problem. This is even more of a problem in your subsequent post on nukes.