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Hard. I didn't even remember till recently. See, I read(Here, I believe) that the AI bonuses affect the people under you as well as around the world. And since those bonuses include extra income...well, it can be a boost, potentially.
There is only one difficulty setting. Increasing the in-game option just gives you a penalty (or a bonus to the AI). WTF is that? I just leave it to normal.
My first game I've started was as Capua on Hard, and I've finished it with a Kingdom in Southern Europe (Italy, Sicily, Africa and additional part - Kingdom of Bohemia . But this was a game when I allowed myself to reload sometimes, as it was rather learning game. After it I started few more games. And - that was a time to face the challenge ! I am playing on Very Hard difficulty now and avoid reloading (except situations when game is against rules, like for example in patch 1.08 when a count could overthrow a Duke, vassal of me and thanks to faction put independent king there and I couldn't do nothing to stop him)
BTW, there isn't a problem with fertility - just give important courtiers something so they would appear on foreign court and penalty won't affect them