I have often seen the "economy would collapse" arguement brought up for situations like this, but I have never seen it convincingly explained. It seems to be a popular way to claim that all sorts of things that diverge from OTL are impossible without having to go into specifics of why that is so.
Fair point. To be specific, the Nazi pre-war economic was threatening to blow up around 1939 because:
- Most of its development had been based on short term loans, both foreign and domestic. Without a war, someone will want these to be paid, and failure to pay on any basis will harm the economy
- Germany's imports had become a bit wonky as a result of buying up materials to build the war machine. This eat up foreign exchange reserves, which exacerbates other problems. This was one motivator to grab other countries gold reserves.
- One of the results of the lop-sided import program was Nazi Germany was bordering on a crisis in agriculture. Agriculture had been a problem prior to the Nazi takeover, but I don't think anything was done to reform it. Now, instead of importing things the general public wanted (butter), the government opted for guns. But, with such poor returns from agriculture sooner or later the Germans might be forced to change the balance.
- Industry while not on a war footing, was stretched quite thin. Some of the bad designs/decisions that came out of the Nazi war economy in the late 1930s weren't simply politics, but a question of trying to build a lot in a short period of time. This ate up resources that were needed for the industrial base.
Ian Kershaw cover the economic issues of 1939 as an aside to his biography of Hitler. IIRC Hans Mommsen goes into more detail.
If they were able to build up their armed forces strongly in times of war with all sorts of blockades/bombings/restrictions, why would it be so much more difficult in peace? The only advantage the war-era Germany has is the resources from occupied territories, but I was under the impression that these were few in number and that many more could have been obtained through regular trade.
War-time Germany could freeze outstanding loans, was using foreign factories and labour for production (Czech tank factories were put to work for example) and could acquire resources relatively easily (not 100% sure but it might have cut down on any market fluctuations in material prices). Blockade had little impact because unlike WWI Germany was getting most of its resources from Central/Eastern Europe. Bombing wasn't effectively disrupting the economy until fairly late in the war. Several of the resources gained through conquest/wartime alliance, it should be noted, were not really available domestically (oil and certain rare minerals used in alloys being commonly noted).
So yes, Germany's economic situation in 1939 wasn't too good and had the Nazis continued their policies much longer it probably would have lead to a collapse. Alternatively they could initiate cut backs, institute reforms and invest in other sectors of the economy... but for the purposes of the ATL, that means the Wehrmacht doesn't get to be unstoppable/huge, shiny wonder weapons are not built etc. I'm not even sure how the Nazi party faithful would react to a radical, and long term, turn against core tennants of the party and it's program.
Never mind that the Allies (including the Soviet Union) won't be sitting on their hands during proceedings. Unlike Nazi Germany their economic and industrial limitations only get lighter with time.