I think I may need to disagree with you here...
I was spending some time in a 1.4 Nissan Micra a while back, and that thing took off like a bat out of hell from idle right through to redline. And that engine does not make anything remotely resembling real power. Granted, the zip dies suddenly at about 130KM/h, but in town you cannot go that fast anyway, and with speed limits, 130KM/h is 10 over. And that car was lovely in the town, parking was a total snooze, it was cheap to maintain, and surprisingly comfortable. I just could not get comfortable in the back...
I mentioned the engine runs out of zip at 130KM/h. This is where the car's weight, setup, and aerodynamic efficiency come into play. Sticking a 1.6 engine in there would improve the top speed, but would not do much (if anything) to the fuel mileage below ~100KM/h. This is more than just a theory.
In 2001, I got my driver's licence at the same time as a friend of mine did, and our parents gave us both cars - only difference between the two cars being colour and engine size. Mine was a 1.3, hers was a 1.8, both were Citi Golfs - a South African variant on the VW Golf mk1/Rabbit that was manufactured until 2007, I think... anyway. So there was a 500cc difference between the two engines.
After about two years of (meticulously logged) usage and much comparing of notes, the following pattern emerged: my car would often be the one used to/from class, while the moment the gang wanted to go somewhere that would require spending time on the highway, we'd use hers. In town, the fuel usage of the two cars was very slightly worse on the 1.8. Above 80, though, the 1.8 was far lighter on fuel than the 1.3 - and the 1.8 could easily hit 170, while the 1.3 struggled to hit 150.
Granted, above 140 the 1.8 fuel usage suddenly started climbing again.
We could change it up with another 'small' car - a muscle car with the obligatory 5.7 V8. True, on the open road the 5.7 will cruise very comfortably at 200KM/h, and very economically, yet at town speeds with the classic stop-start style driving, the 1.3 Golf will KILL it.
It comes down to simple physics and chemistry. Okay, the bigger engine provides more motive power, but it is not providing that power simply because it is bigger - the reason why more displacement = more power is because more air and fuel get burned in the larger cylinders. This is also why turbocharging and supercharging are so popular - the air is being forced into the engine at a higher pressure, increasing the mass of air, thus allowing an increase in the mass of fuel. Petrol burns in air at around 15 parts air to 1 part petrol, hence a 15:1 ratio - this is called the 'stoichiometric mixture'.
We have the ideal engine, made of ideal materials and having an internal friction of 0. It has a single cylinder of volume V. Now if V = 400cc, then to successfully burn it needs 33.4cc of petrol and 365.6cc air. Let us now make V = 800cc. 66.8cc petrol/733.2cc air. Admittedly, this also increases the power output at the flywheel, so the additional displacement is not wasted. Incidentally, the 'ideal' at the beginning of this paragraph meant that I didn't have to bring frictional losses and other complexities into it, and I kinda skipped all of the compression stuff.
Adding that extra displacement can be achieved by increasing the bore, increasing the stroke, or increasing the number of cylinders, or by more complex methods like forced induction. The reason they use forced induction on those teeny-tiny European cars is not because of tight emissions standards or tax, but simply because you cannot stuff a big-block hemi V8 into a Golf body - and Golfs are not particularly small either. Not when compared to the Smarts or the kei cars. They are starting to compete with their muscle car cousins in terms of weight, though, due to safety features, air bags, climate controls, and so on, so they have to make up the power somewhere. Since we cannot have a practical car that is basically seats strapped to an engine, an alternative must be found... increasing the amount of air in the cylinder allows an increase in the amount of fuel, resulting in an increase in power - hence, turbocharging. This method is not limited to small engines - tuned BMW V12 with howling supercharger, anyone? Makes my hair stand on end, that sound, it's so AWESOME a noise!
At 1,000RPM idle on a 1,300cc engine, it should be using around 87cc per rev. A 2,600cc would use 174cc. Since the 2.6L will most likely have an extra two cylinders, we can add a (negligible) amount of internal friction for the extra two pistons, conrods, and so on. Not enough to really be noticed, though, so let's call it 174.0001cc. The upshot is is that a MINIMUM amount of fuel will be required to run an engine under no-load conditions, and the higher the displacement, the larger the minimum will be. Further, the larger engines tend to be fitted only to larger cars - which have more weight, so need more power to get moving.
Where it gets very interesting, though, is one would assume from the above that it's automatic - larger engine = more fuel needed? Wrong, and this is the bit where power-to-weight ratio comes into play.
One car I spent a lot of (unpleasant) time was a Daewoo Espero - a.k.a. Generic Motors J-platform, with 1.8i engine, and shares a badge with a microwave. This car embodies the reason why I despise Generic Motors with a venomous loathing - it is so flipping generic it's depressing. And the same can be said for EVERY Generic Motors I've ever been in. This car, driven like a grandmother, would give me at MOST 340KM off a tankful of petrol - that is, 45 liters. It weighed 1.3 tons. Which is a mere 70KG less than what my Audi 200 weighs... and said Audi 200 has the 2.2 liter 5 cylinder engine, connected to an 80-liter tank, which lasts on average 850KM. So in this case the displacement actually has the opposite effect to the one expected. The car with the bigger engine actually uses LESS fuel.
At the low-end, both cars had very similar pull - the Audi being smoother is all - until one hits third gear. Then the Generic suddenly seems to go backwards. Further, the Generic craps out at 170KM/h, while the Audi goes on to do... well, I've had it up to 245 before, and that was simply because I was not watching the instruments. This is similar to the Citi Golf example above, with one subtle difference - in the Citi Golf example, both cars had identical bodies. Between the Generic Motors Daewoo Espero ('I Wait' in Spanish) and the Audi 200, the 200 has a lower Cd (aerodynamic drag coefficient). The lower Cd means that the Audi encounters less air resistance than the GM Microwave Iwait. The increased engine displacement means that the Audi uses less effort to get moving from rest. Combined, the Cd and displacement result in a higher top speed - not that I often use that due to speed limits - or improved economy.
I like the newer Mustangs, particularly since they got with the program i.t.o. handling, but I still get the feeling that they decided it was a 'small' car when they parked it next to a Galaxie or something.
Meh, it's that whole tomayto/tomaato story all over again.