A step-by-step approach
As we all see, the current system has a flexibility which is difficult to manage in a centralized system. An idea would be to maintain the current system and introduce a central interwiki repository, a common interwiki-workspace (iw) which could be used in all clear cut 1-to-1 cases (cities, people etc). For example, we could have only one interwiki for the city of New York, the [[iw:New York city]], which could direct to the interwiki-workspace containing the existing list of interwikis and possibly a definition comment ("New York city in the US, NY State, do not link here the State of New York or any other city called New York, see [[iw:New York (disambiguation)]]" for other options). This would cover more than 80% of the existing interwikis, leaving the rest 20% to the flexibility of the existing system.