By the rules, that's it - on a given turn, you either conquer or go into decline, and if you choose the first option, there's nothing for you to conquer, so you just sit there.
As far as I can tell, diplomats are just kind of broken in two-player games. If you get them on the first turn, paired with a race with a decent number of tokens, you can conquer through the center of the board, splitting up what's available to the other player, and likely guarantee victory. If they come up later, it's probably okay, since you're unlikely to be able to cut the board in half without touching your opponent's active race.
(I've had one game like this, and in the future I may just remove diplomat in two-player games, or at least veto it if it comes with one of the races capable of splitting the board like that.)