Now, I will prefice this by saying that I don't know about Type 1 and giving birth *together*. But, I do know some about giving birth, and my son has Type 1. So, with that said, here are my thoughts.
I would think that it would not be idea unless you or the midwife knows *very* well how to take care of your wife's diabetes (monitoring bg, insulin doses, how many carbs are needed when low, etc.). Your wife is going to be busy, and won't be able to concentrate on that as well as birthing.
Other issues will come into play, and if this is her first child (sounds like it is), you aren't going to know how her body will react to the stresses of birthing. On the one hand, the stress of it will possibly cause her bg to go up, but at the same time the physical work she will be doing may cause it to go down. You won't know what her body will do until she's in the situation.
Can her midwife give an IV? Although I hated having an IV during labor, and they are very often unnecessary, one may be necessary for your wife. If her bg goes down and she can't take in any/enough food or fluid (I could hardly get anything in me during labor), she'll need an IV with a sugar in it (dextrose is, I think, what they use).
Are you in an area where she could be quickly and easily transported if need be?
Maybe your wife could talk this through with her endo. or a diabetes educator (with experience with Type 1, of course) and hear what she/he thinks. Some would be receptive and have some good thoughts, although I'm sure there are plenty who would not be.
Does her midwife have experience with this? If not, does she know anyone else who has experience? I would think that talking with midwives would be a good place to start.
If, for whatever reason, you decide (or the decision is made for you) that she needs to deliver in a hospital, you could probably still have a midwife attend, which would make the experience much better. I would look for a midwife who has a back-up dr. who is understanding and will allow the midwife to be involved.
Anyway, those are my initial, and disjointed, thoughts. Hope I've helped in some small way.
Congratulations on becoming a dad!
Christie