Allow me to weigh in.
First of all, I want to preface my remarks with the following statement: In my considered opinion, under the terms Germany fights WWII, there is no way the Axis can win the war historically. The disparity in resources, manpower, industrial capability, and even basic foodstuffs is too great. With her enemies unwilling to surrender or come to terms, there's not a lot for Germany to do but either completely occupy her enemies or lose. And occupying her enemies wasn't in the cards. Thus, if we are going to talk about strategies and gambits for Germany, we're talking about whether the gambit or strategy in question can fight the war more efficiently. And, of course, that this a game.
That being said, I side with Donitz and Churchill on the topic of submarines. Germany should have bet on the U-boat and not wasted time or resources on the surface fleet. (I'd quote them directly, but I don't have his history of the war or Donitz's memoirs handy at the moment.) No matter what you are using to detect submarines, it was going to always be easier to find and bomb surface ships now that RADAR is in play. (Before someone chimes in with "But ENIGMA!", I should point out that ENIGMA decryption hurts surface ships as much as subs.) The surface ships were a threat to convoys, but Germany is not ever going to even have close to enough capital ships to strangle Britain. They are large, manpower intensive, expensive ships that require very specific and easy to bomb shipyards to produce. And they take tons of time to build. Let's also stop and consider for a moment the fate of both Tirpitz and Bismark.
With a focus on U-boats from at least 1936, (especially with no naval engineering time wasted on the capital ships), Germany can get better U-boats into production sooner (some of the tech for advanced U-boats, like HuffDuff, was available before 1939, including the damn snorkel). With more submarines in place for 1939, she has a chance to inflict more grievous losses sooner on the British. Historically, Germany starts the war with 57 lousy low-tech U-boats. That number is entirely insufficient. Starting the war with far more and higher tech U-boats would make a huge difference early in the war. And that's when the difference needs to be made. It's too late in 1943. It's too late in 1942. Hell, it might be too late to seriously hurt Britain in 1941. But starting the pain in 1939 with much higher and more massive losses would be better than what happened during the war.
I should point out that even if the U-boats aren't strangling Britain completely, losses in shipping require replacement, which in turn requires steel and manpower. Much like Japan, Britain must replace shipping losses. She has no choice. In terms of attrition, as long as the U-boats are inflicting losses at least comparable to their own cost, it's a win for Germany even if some shipments are disrupted some of the time.
I should also point out that if the Luftwaffe would do its damn job and support convoy raiding operations more instead of pointlessly losing the Battle of Britain, it would go a long way to hurting Britain. But with Goering in charge, that ain't going to happen. (So the lesson here is to fire Goering... with a FlaK 88, for preference.)
Now, obviously, making a large U-boat fleet before the shooting starts is going to drive up world tension, as the only countries a huge submarine force would be used against are France and Britain (you don't need a huge force to sink Soviet shipping). But even with British rearming sooner, the good news is that Britain still has capital ship commitments she must meet. She cannot stop building BBs and CVs completely just to focus on corvettes and destroyers. There's Italy and Japan to think about, and in 1936, Japan and Italy have left the naval treaty system. So, even if she sees Germany spamming U-boats, there's Japan and Italy to think about. There would be a shift to sea lane defense, but destroyer spam wouldn't be in the cards.
I think that U-boat spam, even factoring British rearming, is better than the alternative. It presupposes knowing that Britain are going to attack Germany at some point, but it's still a good bet. It has the potential to fight the war far more efficiently than a balanced fleet with capital ships. Submarine spam, even when countered by high tech gadgets, is more dangerous to Britain than Graff Zepplin and Bismark times four.
A final consideration:
You know who wanted Germany to have capital ships and a balanced fleet? The Royal Navy. When work was being done on the Anglo-German Naval Agreement, the Royal Navy argued that it was better for Germany to have a balanced fleet rather than U-boats and/or Panzerschiffe. It would be easier to destroy and fight. To me, that's reason enough right there to do something different, as I feel the war proved the Royal Navy right. Allied U-boats ate the Japanese merchant marine for breakfast. And Germany's most expensive surface ships, while they enjoyed some victories, ended up being sunk by aerial attack.
