Magento – Magento Local XML not called

You are correct, and this is a valid & used approach for sites with multiple themes. There are a couple of additional (little-known, seldom-used) options which can be used for layout updates which apply to different store scopes: the store handle and the theme handle.

From the action controller superclass Mage_Core_Controller_Varien_Action (link):

public function addActionLayoutHandles()
{
    $update = $this->getLayout()->getUpdate();

    // load store handle
    $update->addHandle('STORE_'.Mage::app()->getStore()->getCode());

    // load theme handle
    $package = Mage::getSingleton('core/design_package');
    $update->addHandle(
        'THEME_'.$package->getArea().'_'.$package->getPackageName().'_'.$package->getTheme('layout')
    );

    // load action handle
    $update->addHandle(strtolower($this->getFullActionName()));

    return $this;
}

For a store with the code 'deutsch' and a theme configuration of 'default' package, 'german' theme, the following handles would apply to almost every view, as most views use them:

<STORE_deutsch>
<THEME_frontend_default_german>

By implementation these handles can be utilized in much the same way as <default />.

Yes, you seem to have misunderstood the syntax involved in what you want to do (though it seems you've understood the principles, and that's half the battle!).

1. Don't use an output block with a typical Magento layout, as the root block is already set as an (the) output block (ref. page.xml):

   <block type="page/html_head" name="head" output="toHtml"> <!-- NO output -->
   

2. You should not be redeclaring the head block; rather, you should reference the one already created (again, ref page.xml):

   <!-- <block type="page/html_head" name="head" output="toHtml"> This replaces the original! -->
   <reference name="head">
       <action method="addCss"><stylesheet>css/normalize.css</stylesheet></action>
   </reference>
   

3. Collect would-be-repeated directives in a custom layout update handle and use the <update> directive to include them in other handles:

   <UTILITY_HANDLE>
       <reference name="head">
           <action method="addCss"><stylesheet>css/normalize.css</stylesheet></action>
       </reference>
       <reference name="content">
           <block type="core/template" name="prefcentre_regform" template="ps/prefcentre/signup.phtml" />
       </reference>
   </UTILITY_HANDLE>
   <!-- include the above on catalog product view page -->
   <catalog_product_view>
       <update handle="UTILITY_HANDLE" />
   </catalog_product_view>