Hi Micha, if you have the patience let me give a little history (which might help other people who read too)
the puzzle I think you point to is shared by several theories going back to 1967 or earlier and may actually be OK (if the theory does not fail for other reasons). it is connected to CANONICAL FORMULATION of Gen Rel
==exerpt Wiki Canonical general relativity===
In physics, canonical quantum gravity is an attempt to quantize the
canonical formulation of general relativity (or canonical gravity). It is a Hamiltonian formulation of Einstein's general theory of relativity. The basic theory was outlined by Bryce DeWitt[1] in a seminal 1967 paper, and based on earlier work by Peter G. Bergmann[2] using the so-called
canonical quantization techniques for constrained Hamiltonian systems invented by Paul Dirac[3]. Dirac's approach allows the quantization of systems that include gauge symmetries using Hamiltonian techniques in a fixed gauge choice. Newer approaches based in part on the work of DeWitt and Dirac include the Hartle-Hawking state, Regge calculus, the Wheeler-DeWitt equation and loop quantum gravity
The quantization is based on decomposing the metric tensor...[now it talks about Lapse and Shift]...Hamiltonian constraint...
...
...DeWitt writes that the Lagrangian "has the classic form 'kinetic energy minus potential energy,' with the extrinsic curvature playing the role of kinetic energy and the negative of the intrinsic curvature that of potential energy." While this form of the Lagrangian is manifestly invariant under redefinition of the spatial coordinates,
it makes general covariance opaque.
Since the lapse function and shift functions may be eliminated by a gauge transformation, they do not represent physical degrees of freedom...
...
References
1. ↑ B. S. DeWitt (1967). "Quantum theory of gravity. I. The canonical theory". Phys. Rev. 160: 1113–48.
2. ↑ see, e.g. P. G. Bergmann, Helv. Phys. Acta Suppl. 4, 79 (1956) and references.
3. ↑ P. A. M. Dirac (1950). "Generalized Hamiltonian dynamics". Can. J. Math. 2: 129–48. P. A. M. Dirac (1964). Lectures on quantum mechanics. New York: Yeshiva University.
===
As this little bit of history suggests, any attempt to use Dirac-style canonical quantization on Gen Rel gives up obvious covariance. It may be really covariant, but this is
opaque, or non-obvious.
You have probably heard of the famous Wheeler-DeWitt equation of Bryce DeWitt and John Archibald Wheeler. That goes back to DeWitt 1967 work or earlier. When LQG came along in 1986-1987, they were just doing the programme already well-established by DeWitt and others---Dirac-style canonical quantization.
That kind of approach inherently leads to a "frozen time formalism".
In that approach, you can really have covariance, and yet it may not be manifestly obvious. The formalism obscures it because things are defined on a spatial hypersurface and the
Hamiltonian constraint controls them to make sure that they COULD evolve correctly in time. But you do not explictly show the evolution.
this is not to say that the standard 1990s version of LQG does not have
problems with the Hamiltonian constraint!

It sure does.
And this even forced a lot of LQG-community to go over to spinfoam, which is more manifestly covariant because it is a 4D path integral approach.
But we should be clear about what the problem is. It is not fatally wrong to use Dirac canonical quantization with a Hamiltonian constraint! That is lovely, even though it may obscure the covariance. It is not wrong to follow in DeWitt and Wheeler footsteps and do canonical Gen Rel and canonical quantization of Gen Rel. However in LQG case, in the late 1990s the particular Hamiltonian constraints that they tried did not work.
Some people then switched over to path integral 4D approach, as I said, but SOME STUCK IT OUT AND KEPT ON TRYING TO GET A CANONICAL QUANTIZATION. These people include Thomas Thiemann, who now has a new variant of LQG which he calls AQG that he presented at KITP Santa Barbara in February this year. It looks quite interesting. there are video talks about this you can watch.
The die-hard group that stuck with canonical quantization also proved highly successful in a simplified version applied to COSMOLOGY called LQC, where the Hamiltonian DOES work, and you get a splendid classical largescale limit.
The people pursuing LQC include Martin Bojowald and Abhay Ashtekar (one of the original LQG founders).
In LQC the time evolution works smoothly and they can run their model back thru where the BigBang singularity used to be. there is a lot of excitement about LQC, which is why KITP invited Bojo, Ashtekar, Thiemann to that 3-week workshop on how to cure classical spacetime singularities.