Smarter AI (other kingdoms/empires and monsters) that will take advantage of large numbers of unprotected settlements on its borders.  I see the problem as a lack of risk associated with many cities.  Not a lack of punishment due to some arbitrary game mechanic like food cost, happiness, etc...  In games like Civ, GalCiv, etc... something that keeps expansion in check is that you have to spend X turns building defense or you'll just lose all the cities you spammed.  In this game I can go to turn 100+ easily without ever defending a city or even building a single unit other than a pioneer.  A champion or 2 smiting monsters is all you really need.

I posted elsewhere a response to this issue.

Several suggestions:  BTW I am playing ver1.0x as i can't downkload patches to ewom)

1) Actually have the soverign expend 'essence' to create / build each settlement.  (the land doesnt support life, remember?)

2) Have a penality that increases with each new settlement established.  BUT also: have ways to minimize (not eliminate) this penality.  One key way to minimize penality is to have a member of the soverign's line (spouse, children, grandchildren) loacted in the settlement. 

Also, consider that many pre 20th centruty wars were noble families feuding with one another  (wars of succession, war of roses, etc).  So, allow that a few scions of the royal family, that were raised in someone elses' court, (one parent is from another soverign's realm), migth have more loyalty to one paretn over the other (one soverign over the other) AND inthe event of war, might 'switch sides, doing a little sabatogue on the way out, or 'stealing something' on the way out, or taking some troops (from the settlelent) out with him/her.  Perhaps, on very rare occasions, this scion is popular, so the entire settlement, intact with troops,switches sides.

I don't see any problem with the concept of city spamming. It's a strategy that's in every 4x game. The problem isn't the strategy it's the lack of AI countering this strategy. In this particular game, especially, it should be much easier to program the AI to counter this given that a significant part of the game involves "wandering monsters". iow, it should be very difficult for a human player to spam out 12 cities. The game I'm playing now I have over 50 cities by turn 180 and own 75% of the map includig most of the shards & crystals, and I didn't even have to fight an AI, unbelievable. At a minimum, bandit groups should be prioritized to attack pioneers, forcing a bare minimum of pioneer escort. Every 10 turns bandits should get a little tougher too regardless of adventure tech researched, in order to force the player to either increase the size or quality of the pioneer escort. Spell casting or bow wielding bandits that prioritize pioneers in battle wouldn't be a bad idea either. Those teleporting spiders should teleport near pioneers instead of just "randomly" across the tactical battlefield. 

I think a reasonable approach would be to have the pioneer pack cost 1 food to produce in addition to other costs. If your pioneer dies, you get the food back, and if your pioneer successfully founds a city, the new city center takes over the 1 food upkeep to support its built-in housing limit. With this approach, however, something would need to be done about your starting city, so you don't start the game with -1 food, even if it's just as simple as every faction starting with 1 food.

buildings and units shouldn't cost food, population should.

divide your total food over your total faction population. if you exceed a certain ratio of food per person, you get a bonus to population growth in that settlement (there will be other factors like buildings and overcrowding). if it is less than a certain ratio, you get a negative bonus to population growth in that settlement. display the various population growth factors in a simple screen like in the total war games. houses should cost nothing to maintain, just determine your hard population cap.

more settlements = more citizens = less food = less population growth

so if you keep spamming settlements, population will stagnate and your settlements never reach higher levels, including your capital. you might have to move some buildings up to level 2 to make this hurt as hard as it needs to. it would work even better if income (that wasn't from gold minging) was tied to population (ie, taxes) and the merchant buildings simply provided a bonus to this.

that way 10 guys in a village you just founded are worth less than 10 guys in a level 5 settlement where you have the infrastructure to tax them properly

Right now, city spamming generates food on a linear progression.

Build one house.  When city levels up, build irrigation.
Those two steps are optional but that way the one house is free and you get a somewhat larger ZOC out of the deal.

But no matter what:     every additional city = 1 additional caravan that can be sent to the food producing city.
That is the net gain.   For every single "outpost".