Despite the overwhelming British victory at Cadiz, the loss of Malta coupled with chaos in Egypt rendered a serious blow to the Churchill administration. With the Royal Navy forced to withdraw from the Mediterranean and the Middle East at risk with its valuable oil supply, the perception that their empire was collapsing jolted the British leadership into ousting Churchill.
Prime Minister Wood (Lord Halifax) reluctantly assumed the role of leader of a fraying dominion when no other suitable candidate could be found and volunteered to be the martyr to stave off further damage to His Majesty’s Kingdom. Once in power, Wood found his options limited. He did not possess the forces needed to push the Italians out of Egypt or the Sudan nor could he raise the flagging morale of the nation which overwhelmingly wanted peace. The situation in India was worsening with riots becoming the norm as British power continued to wane and Japan lurked on the eatsern periphery. With no other option, Wood began negotiations with Hitler through Swedish intermediaries. That proved to be a mistake. The fact that negotiations were going on did not remain secret. The Japanese wanted a seat at the table, and they quickly began seizing British and Dutch possessions in the Far East to gain that seat. Indian nationalists also wanted their concerns reflected, launching a revolt. Spain demanded a seat at the table, Franco wishing compensation for the destruction wrought at Cadiz.
Given the weakened state of the empire, British negotiators were pleasantly surprised by the terms Hitler offered. The British would recognize Italian sovereignty over Malta, Somalia, and the southern third of the Sudan. They would also “internationalize” control of the Suez Canal, with Italian and German troops stationed in the Canal Zone alongside British troops. The fate of Cyprus would remain in limbo with Italy, Greece, and Turkey all pushing their claims to the island now that the British were gone from the region. In the Far East, the Japanese had their control of Hong Kong confirmed. The Japanese claim to Indochina and the Dutch East Indies were also recognized. Germany regained their old African colonies and their claim to the Belgian Congo was formally recognized. England was also forced to cede the Channel Islands in perpetuity. Gibraltar was formally ceded to Franco, though reparations were never granted. The claims of Indian nationalists were ignored while Rashid Ali’s Iraqi government was recognized and British forces were made to withdraw while German troops entered the region under a treaty between Iraq and Germany.
The British armed forces were limited by treaty, but those limitations didn’t appear too restrictive. The British were allowed to build their army back up to its prewar level, though there were restrictions on the number and weight of British tanks. They were allowed to maintain their current fighter force levels, but were not allowed to build any new heavy bombers. The Royal Navy would gradually retire older vessels over a period of five years to reach the ratio of tonnage with Germany specified in existing treaties—Germany could have up to 40% of the tonnage that England had. The British were forced to allow German and Italian Armistice inspectors in to insure that the British were complying with the treaty. They were also forced to pay for any damages to German property, including shipping that was damaged during the war and to pay the expenses of Armistice inspectors. The British were forced to dismantle tariffs and restrictions on investment between the two countries and their empires, and to compensate the Germans and Italians in kind for Axis merchant shipping lost during the war.
With Britain out of the war, Hitler finally convened a treaty formally ending the war between Germany and France. Italy achieved its much sought after goals of annexing Corsica, Nice, and Savoy, and had their claim to Tunisia formalized. Franco would receive minor border adjustments between the French and Spanish parts of Morocco for his late entry into the war. France was forced to open the ports of Saint-Nazaire and Lorient to the Kriegsmarine and to cede the French Congo, Alsace-Lorraine and French Flanders (Nord-Pas de Calais, the department of Nord, and roughly the arrondissements of Lille, Douai and Dunkirk) with future territorial adjustments to follow in northern and eastern France, while Germany agreed to gradually withdraw from the occupation zone and relinquish authority back to the Vichy government. The French were also forced to dismantle tariffs and restrictions on investment between the two countries. All signatories agreed to recognize German territorial rights to Greenland, Iceland, and the Faroe Islands.
The war was over. The British and French concentrated on consolidating the remainders of their empires, and dealing with the economic problems wrought by the war and the cost of paying Hitler his reparations.
With his western flank secured, Hitler decided it was time to turn east and destroy the Soviet Union in the spring of 1941. In the meantime, he quietly worked to exploit the potential of the treaty to reduce England to a German dependency. German Armistice inspectors became more numerous and more aggressive in their inspections as the winter of 1940-1 progressed, demanding access to British factories, military bases, and even radar stations. German air and submarine bases gradually appeared in the Canary Islands, then in Iceland and Greenland as the Reich’s reach expanded. Germany’s star was in the ascent.