It's very tempting to change the default encoding, and I messed around with it too when I first explored Python unicode issues a few years ago. However, I now think that changing the default encoding in a Python application is not the right way to go. If you do so, you run the risk of writing applications or libraries that aren't going to work correctly on any other system.
For a slightly involved example take the case of Silva and PlacelessTranslationService.
Silva (a Zope-based CMS) a few years ago went through a painful transition to use unicode inside throughout. The ZPublisher can be configured to encode any unicode response to UTF-8. For input, we make sure everything is decoded into unicode.
This all worked pretty well, though of course we did find 'leaks' once every while due to oversights in not doing the right encoding bit. The leaks are aggrevated by the fact that Zope 2 isn't very unicode pure as a framework.
Then we installed PlacelessTranslationService. This had been developed for Plone, which does not use unicode the Python way. Instead, as I understand it, it stores its content as UTF-8, and then the codebase has a numer of hacks to make it deal with unicode strings too. Not by changing the default encoding, but by overriding an important StringIO that gets used by the Zope Page Template engine to do something very similar -- encode to UTF-8 any unicode that gets passed to the page template engine.
Suddenly we were again in a mire of unicode-related bugs. Our assumption that the output of a page template was a unicode string was broken by PlacelessTranslationService, and this caused things to break in subtle ways. Desperate hacking ensued... (Five 1.1's i18n support should eventually fix this)
Changing the default encoding is tempting, but you're really going to be in trouble if you're going to give code that does string concatenation to anyone else. Imagine you've written an XML processing library and you happily concatenate UTF-8 strings with unicode strings in its internals -- it'd almost certainly not work correctly as soon as I use it in my application, unless I change the default encoding as well.
The best way to deal with unicode is to make sure that everything that enters your application (from the filesystem, from the web, or a database) is decoded into unicode, and everything that leaves your application is encoded (preferably to UTF-8).
Thinking it was easier before unicode came along is probably slightly deceptive -- you would've run into worse problems as soon as your system had to deal with more encodings than latin-1. String encoding issues just are hard.
That's not to say the situation with Python's unicode support isn't frustrating. I've thought long and hard about this when I suffered through this, but I couldn't really think of a better solution than the route Python took. If Python didn't have to worry about backwards compatibility I'd suggest making all strings unicode such as Java did, and introducing a separate for storing bytes, but that wasn't possible.
I do agree that life might've been easier if the default encoding of Python had been set to UTF-8 instead of to ascii. On the one hand this is catching more errors. If you're willing to break the ease of backporting code to older Python versions, I believe if, say, Python 2.5, shipped with a default encoding of UTF-8, it wouldn't actually break anything. But if I did it for my Python, I'd have problems soon as I gave my code to someone else.