There's a lot of misonceptions in here, some major, some minor.
English derives from a more coastal dialect of Germany, and is closest to Frisian and Dutch (the latter more by convergent evolution). Modern German comes from a High German dialect, which is much more different (although still West Germanic). In 1000, English and Frisian would likely have been mutually intelligible--particularly since they would have been visiting the same markets as traders--but the same would not be true for English and Dutch or English and Germanic.
Old English lost its inflection and became highly synthetic. This is primarily due to the influence of Old Norse, a North Germanic language, and the process would have begun some time before the Norman invasion in 1066. Note that a large Danish population settled in England in the 800s (the Great Dane Army invaded, and Alfred the Great ultimately let the settlers they brought with them stay), and they eventually brought Swein Forkbeard into England in response to Æthelred the Unready, which eventually leads to William's conquest in 1066 after several successive kings find themselves dead with no sons. The loss of inflection made it easier for North Germanic and West Germanic speakers to understand each other, since the roots were largely the same but the inflectional bits were different.
Your characterization of the Holy Roman Empire is wildly inaccurate. While there were several independent cities of the Holy Roman Empire, there were several large duchies and kingdoms--most notably Brandenburg, Bohemia, Saxony, the Palatinate (the four secular electors), as well as Bavaria and Austria. It was by no means "at best a collection of city-states."
Regularization is not an inherent process of language evolution. Actually, English isn't really systematically regularizing: American English has transformed the past participle of "dive" from "dived" to "dove", and there is effectively a movement to make the plural of "octopus" into "octopi" as opposed to the correct, regular "octopuses" (or the actual Greek plural "octopodes").