I think the argument holds very little distinction IF it's limited to instances. Why? Because all the cross-faction problems are centered around the open world. Cross-faction taunting, being able to support the other side while they invade your capital, trading, etc.

But when you're in an instance, the lines are already a little blurred. You can PvP against people of either faction within arena or battleground instances (or even with dueling.) In a PvE instance, they'd just treat the other side as if they were people from another server.

Or, let me ask, how does it break the game if Bob has a Tauren and Bill has a Gnome, and Bob sends a RealID message to Bill and says, "Bill, I think we should go kill some internet dragons"?

At this point in the game, there's no* gameplay difference between the two factions, and RealID raiding is already restricted to older content. I think they're in a good position.

* This excludes faction-specific content, which could be handled any number of ways, and race abilities... And let's not go into that can of worms.