It works until you want to use PIL or LXML and need to compile a python library with native extensions, or if you want to use a datastore other than google's.
At least, you couldn't do those things a few years ago.
Your point about compiled python libraries is correct in principle, but it's worth pointing out the GAE python comes with PIL and LXML (and a bunch of other libraries) pre-installed these days:
At least, you couldn't do those things a few years ago.