I know this is an ultra-necro reply. Just to say that I am having a blast playing this scenario.
I'm playing as Italy on Diety difficulty with AI aggression ramped up to max. Italy is the right challenge for this scenario. You have an interesting postition, a not-so developed industrial potential which requires a lot of optimising, and a good deal of options for expansion (and alternate-history type role-play).
I used a few self-imposed limitations too. I don't import any national 'Trade' resources, relying only on Italian units and those that can be made from conquered trade resources. The AI is not too bad at fighting at sea. They sink my transports with bombers if I am careless enough to leave them undefended. They even put down a few sizeable invasion forces of Sherman tanks in Spain when I crossed the Gibraltar straits to attack Spain.
The Soviet Union destroyed Finland, Norway and Sweden. They also captured 2 Spanish cities (I use this as an alt-history where the Republic, not the Nationalists, won the civil war and Soviet influence was strong in Spain.) The Germans rolled over Europe but although they captured Portsmouth, they were unable to keep hold of it. Alas, the AI is irreparably bad at sea-landings and inter-continental wars.
Now as Italy I control North Africa up to the Suez canal, Germany controls Syria and Iraq. I also captured Yugoslavia, Crete, Malta and Rhodes. I've just finished capturing Spain, but I'm going to need a LOT of MG infantry to make the landing onto the Balearic Islands if I want to finish off Spain and end the resistance on the Spanish mainland. Spain is not actually a bad power. Due to the choke-pointyness of the Pyrenees, they were able to hold off the German attack, and it was very fun to land units by airport and by sea in the south of Spain, pushing against heavy resistance north.
I'm going to use Spain as a launching pad to attack the UK. Also SU and Germany fought one war but it ended in peace without much changing. Not sure whether to stir the pot a bit.