The loyalty penalty is meant to reflect the difficulty in governing a massive and influential empire. Historically, superpowers like the Romans, the Mongols, the British, and the USSR struggled under their weight of diverse populations, eventually fracturing into much smaller components. This should be on top of the normal loyalty mechanics as a counterweight to the other bonuses. It could be immersively argued that this reflects internal strife, which the normal loyalty mechanics don’t seem to account for. The US may be heading this way now.