Regarding the coexistence, yes it's possible. The machines need humans to survive (the fields) just as the humans need machines to survive (machines of Zion, as was mentioned in Reloaded). Now that there is peace, those in the fields/matrix who wanted out would be released. This implies that there are other humans staying behind to provide energy to the machines.
Concerning Smith and the Merovignian, appearantly he did turn him eventually just like everyone else. But unlike to Neo et al, he wasn't particularly important to the agent where at the same time he had a role to play in the plot (Just like the blinding of Neo was done only for symbolism, to show off their computer animations and to cover up the fact that Reaves couldn't produce any tears at the one time he was supposed to cry ( [img]tongue.gif[/img] ), it didn't have much of a function).
Neo's losing leading to a win probably works because the Architect used Smith to balance out his 'equation'. Put simply,
xNeo =
ySmith, if
xNeo = 0 then
ySmith = 0 as well, so if Neo goes, then so does Smith.
The trouble with installing EMPs in the city is the aforementioned dependance of the humans on machines. Firing an EMP in the city shuts down those machines, and is therefore rather counter-productive. They are only really useful away from other 'friendly' machines.
BTW, the 'big head' did try bluffing/lying, so I don't see why they should keep their word. Revenge... is just a word
