Auto-levelling can make the game easier, much easier, if you min/max the system right. Since levelling your character doesn't make you any more powerful relative to your enemies, you do whatever else you can. In Oblivion one of the most powerful character builds is level 2, never raises his major skills (or never sleeps), and raises every other useful skill instead. (A similar level 1 character would be more powerful, but apparently you can't really finish the game that way.) In Final Fantasy VIII, I remember doing something similar and avoided leveling my characters. I managed to keep them low enough that I got the easiest version of the final boss, making it one of the easiest boss fights in the game.
(I also remember trying to keep my level low in Final Fantasy Tactics. Like Tactics Ogre, its spiritual predecesor, it had auto-leveling enemies in random battles so this made me much more powerful relative to them. Unfortunately it was like Tactics Ogre in that the story battles had fixed level enemies, so it made some of these battles very difficult.)
Basically these auto-levelling systems make the optimal strategy rather degenerate and counter-intuitive. In the worst case, as can happen in Oblivion, playing the game normally can result in you getting progressively weaker relative to your enemies, ultimately forcing you to give up (or lowering the difficulty slider...). Any game which can have to saying "Oh, crap, I levelled", is probably doing something wrong.