Germany actually had a policy towards its small, democratic neighbours Sweden and Switzerland:
Incremental demands for concessions.
Ask for stuff, nothing big, get it, make a new small demand, nothing that in itself will jeopardise national sovereignity too badly. That way there is no risk these small neighbours will do something rash, or some kind of dramatic gesture not in Nazi Germany's interests. It would be simply idiotic to throw away national independence over demands for a coordination of the output of Swedish and German logging industries for example, i.e. humdrum administrative stuff that don't really work for a rallying call to arms... And thus, slowly, they get reeled in.
Not that outsiders would notice, but there was a whole string of crisises in Sweden during the first years of WWII, all triggered by a German demand for a concession, like the 1941 "Midsummer Crisis", or the winter of 1942 mobilisation and placement of 300 000 along the Norwegian border in response to a threatening German buildup of forces there.
Everytime the Swedish government relented, it fretted terribly over whether they had given in too easily or not, and every time they refused Germany something (yes that did occur as well) they went into an absolute funk over if they had gone to far and provoked the Germans sufficiently for a military operations.
But no, Sweden can't really be regarded as neutral during the period 1940-1942 at least, since it was completely hemmed in by Nazi Germany, dependant on German coal to keep its heavy industry running, 80% of its trade going to Germany.
The problem with moral condemnation of this state of affairs is simply that at the time there was no alternative to turn to. Had for instance the British beat Germany to Norway, then there would have been a real alternative power Sweden could navigate towards. But since that was not the case, Sweden was alone in the room with the 1200 pound Nazi gorilla. Of course, there was always the option of joining it to go fight the Soviets alongside the Finns.
But Sweden from 1943 otoh was also fine with de facto allowing Britain and the US to use its airspace for bombing missions over Germany, etc. Not really neutral then either, but somehow it retrospecitvely draws a lot less facile criticism...
