1) Diplomacy Lv1 = + 75 fairies
2) Diplomacy can hire gnomes removed from the game!
3) It is necessary to limit the army to 7-8 slots.
Otherwise, the enemy comes to you with 16-20 slots.
I see no issue with 16-20 slot armies though. It's not Heroes of Might and Magic, having more unit slots doesn't give you an actual advantage - what matters is the general unit count. I do think that the game would benefit from some kind of advantage to restrict the amount of factions in a given army. Not sure what would do the trick.