Yes Italy could be tricky starting out as a neutral power, but I think you have to limit them from going fully to war until the Germans attack France and/or UK (which would probably be turn 2). You need to allow them to annex Albania in the first turn though (April 1939), but don’t want them fully in the war until the second turn when they can DOW on the French and Brits on their own terms (after the Germans attack France/UK). If the Italians don’t DOW on round 2, the Brits can DOW on Italy turn 3 (pre-empt strike because Paris was attacked). Might even consider changing the Italians in the turn order to go right after Germany so they can DOW turn 2 before UK (and if they didn’t DOW allow UK to DOW the Italians). The Italians going right after Germany (as the Euro axis), wouldn’t be much different then the UK going right after the USA (as the western allies).
This also brings up what the Russians can do as a neutral power (they need to be able to make limited attacks). In the first turn (Sep/Nov 1939) they should invade Poland and part of Finland (Vyborg only). Then there is the Soviet-Japanese war in the summer of 1939 (not sure how you handled that on the Pac side, maybe allow for some border clashes before the NAP is signed and the whole Mongolia rule comes into place). Turn 2 (June 1940 around the time Germany invades France) the Russians need to annex Baltic States and Bessarabia. but shouldn’t be allowed to go any further until at war w/Euro axis. Maybe turn 3 (Sept 1941) Russia is allowed to invade NW Persia?
The time line for the Germans is going to be difficult regardless of how you handle things. Germany should start out with only 3 territories. W Germany, Southern Germany (includes Austria annex 1938), and Germany (includes Sudetenland annex 1938).
Territories like Finland, Slov/Hungary, Romania and Bulgaria are pro axis, but it will take a couple turns for them to get to Romania and Bulgaria to activate (which kinda fits the actual time line of 1940/1941)
Need to re-work the neutrals a bit so the Germans can attack what would be true neutral counties like Denmark and Norway. Maybe have a list of neutrals that can be attacked? Maybe even give an NO incentive to keep them from attacking territories like Sweden or Switz because it is more lucrative to leave them be? Although the Germans had invasion plans for both, they still benefited from them staying neutral as well w/o the hassles or resources needed to invade and garrison them.
IMO you don’t want to put restrictions on what territories the Germans can attack on the first turn, but you probably want to discourage them from attacking certain territories or Powers. Like you could have a Maginot Line in place so the Germans could have the option of attacking France on the first turn, but it will be devastating to do so (something like all French and English units def +1 when attacking France from W Germany). You want them to go through Holland/Belgium where they will face less resistance, and attack France on Turn 2. In light of this to show the allies were really not prepared for this plan you could rule in that the French and Brit units def-1 when attacked from Hol/Belg. This might help because maybe once the Germans take Hol/Belg the allies will try to pull some units out of Normandy/France instead of reinforcing them. Plus you kind a need the Dutch to fall to make the whole UK/Anz work in the Pac w/DEI.
What will the French buy on the first turn with their 19 IPCs, they could make it hard.
UK sent the BEF to France at the French/Belgium border in 1939, so they should be represented when the game starts (Normandy and France). Will the Germans be allowed to attack the Brits and/or French on the first turn? (maybe but should be an incentive not to).
The political situation is kinda interesting, and you could follow history a bit and invoke a Phony War Rule as an incentive for Germany to not attack the UK/France directly on the first turn. If the Germans invaded Poland, Norway, Hol/Bel etc……, but don’t directly attack the French or UK this will provoke a Phony War. The French and UK will DOW on Germany on their respective turns, but aren’t allowed to perform attacks against the Germans that turn (Phony War). They would be able to reinforce France, or pull some troops out (should limit how many transports they have in range). They will both surly move their navy out of harms way though so the Germans cant’ hit it on the second turn.