What I mean by the penalty game mode is that i think there should be an option that can be turned on (such as Kingdom of Italy, Independent Wales, etc.) that penalizes countries for doing badly (losing capital, rebels defect, rebel independence). As I said before, this should be an option because not everyone would want to have penalties in their game. Also, there could be penalties for specific countries not doing what they should be. For example, if another country steals the Aztecs from Spain, they should take a penalty for that because the Spanish came over for gold, and if another country had taken the gold, Spain probably wouldn't be as attracted to the New World. But anyway, does anybody like this idea, or do they hate it? Should it be changed in some way?
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Those penalties already exist. The treaty of Tordesillas allows Spain and Portugal to "steal" provinces in their historical colonies (e.g. Mexico) from other players without a declaration of war.
And if a player loses his capital then he does need no further penalty. Normally you can´t lose your capital as you can´t cede it in peace deals and it will be the last province you own before you are forceannexed. The only way would be rebels revolting away. And if a player can´t deal with that he will certainly not be able to deal with further penalties.
Those penalties however would contradict the goal of the AGCEEP mod as far as I understand it. That is to guide AI countries towards historical development - and not to further punish those that fail to achieve their historical achivements.