I think Germany might have won, but in any case the war would have gone on at least a year or two longer. In fact, they might have been able to produce a deadlock on the eastern front. With rail centers intact and factories at optimum production, fighters and tanks would have been made in higher numbers and could have checked any Allied invasion of Europe. As for Russia, though...

My opinion as to the chain of events is as follows...
Germany withdraws from North Africa as usual, and loses Sicily. But Kesselring, armed with more firepower is able to drive the Allies off the shores of Italy. Targets in eastern Europe are safe from the west. The failure in Italy causes the Allies to postpone the invasion of Europe by at least a year. With the west at least temporarily secure, Germany diverts as much manpower and equipment as possible to the east. Perhaps they score a victory at Kursk, and then try to resume the offensive against the Soviets. But either way, Germany can now more fully develop "wonder weapons" and use them with a higher degree of potency. If they manage to beat the Soviets, then the Western Allies dont stand a chance. If they dont but develop the A-bomb, then very soon after England would be bombarded with it and rendered useless as a staging point for an invasion. And of course, it would likely be used on Russian troops and cities. All in all, Germany is in a MUCH better position to conduct a war.

In my opinion, strategic bombing of industrial targets in Germany was critical to the war effort. I personally dont like the residential bombing, as it seems rather cowardly, but overall, without heavy bombers and the use of them, the Allies would have been in a world of hurt.

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