Well a couple of things:
Spain should be at 4IPC: 4 inf, 1 ARM ,1 art, 1 fighter, 1 DD, 1 AP
Turkey at 3: 4 Inf, 1 Arm, 1 Art, 1 AP
Arabia at 2: 1 INf
Sweden at 3: 3 Inf, 1 Art, 1 Arm, 1 AP
each South American nation gets 2 Inf, and each African neutral gets 1 Inf
Sweden provides 1 IPC to Germany each turn as aid as long as they are neutral
Spain can loan out its armor division representing the blue division to Germany while neutral.
Diplomatic is done like Technology except you cant buy it: each side targets one ally per turn and its converted on a roll of 6. If its converted you pay IPC equal in cost to value and then you can use the forces, but you dont collect any money. The only way to collect income is by direct occupation and violate its neutrality.
Either side allies or axis can do this at any time, but you must defeat all its land forces. If it has any leftover naval or air they can be ‘interned’ by the other side and converted (replaced) with its own pieces.
problem solved easily.