Well, it sounds as if the Axis are going to win this game big time!
I didn't even bring up the possibility of what UK convoys are in range of bombing from Spain. I figured that if the Axis have Spain/Portugal, then the Axis are definitely in control. If the Germans are in such a position that they can situate 6 bombers in not only France, but in a conquered Spain too, then yes- the UK is screwed!
Remember though that the UK can only be dropped to a certain PP number through convoy damage. That number can be lowered as you point out by direct strategic bombing of the Home Isles, but that then means you aren't putting production towards other units that the Germans may need on the Eastern Front.
Another point towards this topic- Are you using the optional entry rules for the USSR and USA, or are you going with the straight forward base rules?
The optional rules will speed up the response/entry of the US against the Axis because of the high damage from the convoy attacks and the attacks upon neutrals like Spain. We pushed for the development of these optional rules to more accurately reflect the playout of the game based on the actions of the Axis instead of the more historically "locked-in" pattern of the base game. It always seemed very goofy to have the US and USSR coming in at set times when the war was playing out in a totally different manner than it did for real.
As such, you can get screwy conditions like you are getting in which the Axis can ignore certain issues that they would traditionally had to honor and pursue some very unlikely tactics with little to no repercussions.