I wouldn't deprive them of the opportunity to at least mix it with the big boys, they should be entitled to the opportunity. That is why a preliminary microstate group stage would be the best solution, in my view. Simply banishing them from the competition altogether is far too elitist for my liking.
If there was no desire for these national teams to exist, they probably wouldn't. Should they wish to abolish their national teams, they have every right to do so. It cannot be enforced from any exterior body, for example, UEFA cannot 'downgrade' a national team to club status. They are two separate types of organisation altogether.
The 'downgrading' option, is not an enforcable or feasible option. It's akin to abolishing the national teams of these microstates. Once abolished, they cannot return. If there is no desire for these teams to be abolished, it will not happen, and I suspect there is no desire for the likes of Andorra or Liectenstein to abolish their national sides. The opportunity to enter the Euro's allows these countries to gain exposure in their own little way, it enables them to interact with fans from different countries and visit stadia across Europe, and undoubtedly provides economic benefit.
Despite not being a remotely feasible option, another point against it would be "where does it end?".
Are Iceland included in this 'downgrading'?
Malta perhaps? or Estonia? How about Azerbaijan? or Slovenia?, Latvia? or Puskas' country of birth - Hungary (just the 5 points between them and the total achieved by Liechtenstein). Despite this 'limited pool of players' which you say will always prevent them from ever being a threat, a team who has access to a nation of 10m people can only achieve 5 more points than a team who has access to a population of just 35 thousand (I'm equating pop'n with 'pool of players' just to give a rough idea of the proportions involved, despite the fact that the 'pool' may be distinctly smaller).
Defining the boundary is difficult, as it is clear from the point tallies that there are an abundance of sides who achieve a low points total
It's also not a question of whether they will be competitive or not, it's a question of allowing them the opportunity at the very least. These countries can be competitive in as much as, they can get results against footballing nations of a significantly higher stature e.g. Liechtenstein drawing against Slovaki and Portugal in their 2006 WC qualifying campaign.
This is all speculative, as the proposal is simply not feasible in any case. An external body cannot abolish a country's national team, only they can and for as long as there is no desire to do so, it will not happen.
The preliminary group would be the best possible route to take as far as I can see. The worst sides from the actual group stages should be knocked down into this group. Whoever wins the preliminary group would then go forward into the group stage proper.
It's just the microstates I feel should have their status changed. The other nations you mentioned have the potential to develop and improve because of their larger populations. However the microstates stand little to no chance of doing so.
Take San Marino for example.
In EURO 2008, they played 12, won 0, lost 12, drew 0, scored 2 and conceded 57.
It's just a farce.