Depends on a lot of factors really. I have seen Italy enter the Allies, and the commintern. If your playing a historic MP game then here is my advice for Italy.
1. Consolidate your Navy: maybe simplistic but I think Italy starts with 40+ ships. Stacking is an exploit in my opinion, however some groups allow for it, if its acceptable in the group your in stack your italian navy and roam the Med for the british. If you cant stack then create 3-4 navies with the maximum number of ships and group them close together and roam the med. The point here is with all your ships in the med the UK will have to commit a large amount of its navy to fight you, and that leaves less navy to fight the Kreigsmarine. Granted the Kreigsmarine isnt a powerful force but you hope the german player builds some subs and harrasses britian.
2. Sort your military: Italy has a big army to start, mountain troops scattered about some calvalry as well. Again another exploit but some groups allow it. Take some of your calvalry and strat redeploy. Lowers your supply needs and allows your to maintain your inf and moterized divisions. Also those calvalry units I place them in Ethopia close to the belgium congo. If your in the Axis and Germany DOW's belgium those cal units move fast and will grab that rubber producing region. Also move your mountain troops to your border with France. Slowly reinforce to 100 all your other units but becareful of that supply slider because with the limited IC's you have, and the large army you dont have much for production and research.
3. The Med: This is your pond and your region. For me I like to make removing the UK from Nothern africa my priority and achieve it without german support. IF you can achieve this goal that free's up german troops for conquest somewhere else. Having those navies around help as well, once you attack use those ships for bombardment.
4. Yugo and France: I would let the germans have Yugoslavia for the med port. If you goto war early against Yugo and it has the right government the WE of the allies wont shoot through the roof. Allowing Germany to have Yugoslavia isnt what a lot of Italian players want but its better to have Germany there so he can move troops to the balkans faster, and not have to bust through gibraltar to get them into the MEd. France should be vichied. Its tempting to grab some land as Italy but let the germans vichy France, a decent buffer, and it helps Japan as well. Normally in an MP game I ask for some resources from Germany or Japan for Vichy.
5. Greece/Turkey: Here is where Italy should get a bone. I would ask Germany for thier support via expiditionary forces for a conquest of Greece and Turkey. These two gems will give Italy some nice Jewels in its crown, better strategic postion for a middle east or russian campaign and great postion to grab bulgaria if it isnt already in the Axis.
6. Defense and support: Once France has been vichied your going to have to support and defend Axis territory. Work out something with the Germans and decide together how best to defend the Med and atlantic wall. Italian infantry makes for decent coastal defense with fortifications. Send some expiditionary forces if you can and take that reduction of supply IC and build more or research.
7. Poor mouth: The tactic I use as Italy in MP is crying poor mouth the to other Axis. Your position is important to the Germans, even though they maybe the big boys he is going to need your support. Give it to him, for a steady diet of tech. Review the house rules, if tech trading is there get as many gold theory techs as you can from Germany, and Land Doctrine.
8. WM strategies: coordiante with Germany. He has surplus coal and can do 4-1 trades to get what he needs, Japan has steeel. Get together and in 36 set up a three way market strategy where your trading from strength and can focus on one thing and then ship to your partners and they intern supply you with the resource they are obtaining.
9. Double Cross: You can always lead Germany on and ask for all the tech and resources you can get and make a side deal with either the allies or the commintern. Make sure you get something from either for your double cross. Either one of those alliances would happily take you in, remember to gauge your group determine if they want a historical match or its freeform. If its freeform milk the germans, and join one or the other alliances and keep your motorized units and the alps and move North one war breaks out.
10. Solo: as Italy you can early on attack and annex Yugo, Albaina, Ethopia, and either bulgaria romania, or greece. Always check the government types and try to hit non democratic governments. If you take this route do it early and do it with some kind of assurance from germany that he wont invade. Once you get these new lands consolidate and defend. You will have pissed some people off but your still have your ace in the hole, and that is your free to join any alliance you want, one of them will be happy to take you.
Well these arent gospel but they are some of the things I have come accross and tried in my MP career.
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