Actually, Tolkien explicitly stated that his novels were not allegorical. In fact, quoting his own words, he "despised allegory in all its manifestations".
The Professor often stated that the Shire intentionally resembled rural England, as well as he granted the exact detail that the Shire and Imladris are positioned at about the latitude of Oxford (United Kingdom), where he used to live and work. Apart from this, most of the geography only vaguely matches up with actual Europe, and in every interpretation there are many elements that lack any correspondence.
Proposed interpretations Edit
Europe during the Cold War (1950's) Edit
In an interpretation very common in Europe, Middle-earth corresponds to Europe during Cold War. Therefore, the Lord of the Rings would be an allegory for the present time when it was written.
Mordor corresponds to the Soviet Union and the Communist Block, Valinor (across the ocean) corresponds to the United States, the rest of Middle Earth corresponds to Western Europe. Gondor and Ithilien (East Gondor) correspond to West Germany and East Germany, respectively.
Saruman and Isengard can be seen as Yugoslavia, that broke the alliance with Soviet Union and stood by itself. Alternatively, they can be seen as the Communist parties in west European countries, that somewhat try to betray and backstab the peoples they live with.
The Haradrim correspond to the Arab countries. Southern Europe (e.g. Spain, Italy, Greece) escape this interpretation.
Europe and Nazism (late 1930's - early 1940's) Edit
This interpretation comes from the United States, where Nazism is demonized far more than in any other country in the world (except perhaps Israel).
The evil land of Mordor can be identified with Germany. Therefore, Ithilien would represent the lands conquered by Germany at the beginning of the war, and in particular German-occupied France. Gondor would then be the Vichy France. Mirkwood and Dale would be Denmark and Norway.
The allies of Mordor, i.e. the wild Eastern men and the Haradrim, would correspond to the willing allies of Nazist Germany: Finland, Hungary and Romania to the East and North, Italy and Spain to the South.
Neutral countries (Switzerland, Sweden) escape this interpretation.
Europe during late Middle Ages Edit
It is better to say that in Midde-Earth, the actual geography and the cultural landscapes over Europe are separated in scale.
The Easterlings f.e. have been commonly interpreted to have properties similar to huns, mongols or turkic peoples in studies, but on the Middle-earth maps set according to given scale and superimposed over Europe (as the one on the page), these would be mainly coming from much nearer than the said cultures. Taking the scale given on the map as a fact, we might find similarities between Easterlings and Gothic culture in the migration period, when they were taking over lands once inhabited by continental Celts. The two sizes (cultural and geographical) of Middle-earth make direct comparisons to modern day Europe and it is history somewhat awkward and many interpretations have been given. The scale given on the map included in the Lord of the Rings states NW-parts of Middle-Earth would be about 4 millions km2 and some, but the cultural references to European history no doubt span the whole Europe and likely parts of North Africa and Middle East... Culturally we might take the size of NW Middle-Earth to be exactly the same size than Europe (10,2 Mkm2). This introduces ambiguity with respect to which cultures in Real Life are analogues to which in Ea, with the exception of The Shire, which is an analogue of English countryside and its culture. Below is a description of one of the theories of this conundrum, one which is quite commonly used in this context.
Starting in the northwest, Lindon corresponds to the remnants of Celtic Europe; and like Celtic Europe (Ireland, Man, Scotland, Wales, Cornwall, and Brittany) it is populated by a peoples who were once more populous and widespread than they are now, and have been relegated to the furthest reaches of their respective continents.
Eriador is curious, because it shows simultaneous elements of many periods in the history of Great Britain, the area which it is most analogous to. The Shire is, naturally, medieval and early modern England (one can gather this especially by the Shire Reckoning, which according to them places the end of the Third Age in the 15th century). The native peoples of Eriador (of which the Bree-folk are remnants) resemble the Celtic natives of Great Britain from before, during, and after the Roman occupation. The greatest evidence for this is the physical description of Breelanders (dark hair, stout) and place-names, which the Professor lifted from Brythonic ('bre', meaning "hill"; 'cwm', meaning "valley"; and 'chet' meaning "wood, forest"). The Romans themselves are the Numenoreans, and the fragmentation and fall of Arnor is very similar to the Roman evacuation of Britain at the start of the 5th century. The Misty Mountains do not readily conform to anything found in Europe; however aesthetically they are extremely similar to the Alps.
Continuing east into Rhovanion one comes to Germanic Europe. In the North there is the Bardings, Beornings, and other Northmen, whose language is Scandinavian and most of whom have names lifted from the mythology of ancient Scandinavia (Gimli, Gandalf, Bard, Beorn, Dale, etc.). Moving south through Mirkwood one comes to the princes of Rhovanion who aided Gondor in its wars against the East. These have names largely of Gothic origin, who lived in many of the wooded plains of eastern Europe during the Migration Period. Lastly we come to the Rohirrim, who despite living in the wrong place geographically, are culturally and linguistically most similar to the ancient English who settled in Britain. Like the ancient English (and the ancient Germans, when they settled southern Germany) they adopted a new home in a land largely populated by Romano-Celts (Dunlendings, under the de jure authority of Gondor) after the collapse or reduction of Roman authority (depopulation in the case of Calenardhon). The works left there, such as Helm's Deep, are beyond the skill of the Rohirrim to match, but they live among them and utilize them (as the aqueducts, baths, and cities of the Romans were beyond the ability of the ancient English and Germans). The Anduin is very similar to the Danube, despite the reversal in orientation, due to its prodigious length and its largely flat and meandering course, surrounded chiefly by woodland and occasional hills. The White Mountains do not exactly conform to the Alps, but like the Misty Mountains are most similar to them, as well as the Dinaric Alps and the Carpathians.
In the South there is Gondor, which is most akin to the Byzantine Empire. Both are ruled from "new" cities (Minas Tirith and Constantinople) who are named for older places (Minas Tirith for Minas Tirith (First Age); Constantinople for Rome, as its true name was 'Nova Roma'). Both are remnants of a once-greater civilization, who suffer from both prolonged pressures from the outside, chiefly the east; as well as internal strife and plague. Indeed the two are so similar that the Siege of Minas Tirith practically plays out as a 'what-if' of the Fall of Constantinople in 1453. Mordor falls into the area of Anatolia, Cilicia, and the Caucasus. Like the Ottomans and the ancient Persians, Sauron creates an empire in this area that encompasses many desperate peoples, which he uses to wage war against the West. Harad is a conglomeration of North Africa and the Levant. Both have been either ruled by, cooperative with, or antagonistic against their respective Wests at various times, and both are geographically in the same place. The use of elephants in war was also a common feature of North Africa in Antiquity, which fits with the Haradric habit of utilizing Mumakil. This further places Far Harad with Sub-Saharan Africa, which explains the black troll-men seen at the Siege of Minas Tirith.
Rhûn is a slight conglomeration. Geographically it resembles the Volga river basin and the steppes of Central Asia. The cultures of the eastern peoples do not perfectly fit, due to the Professor only providing vague extrapolations, but the nomadic habits of many of these peoples (the Balcoth and the Wainriders) fits with many cultures who were indigenous to the Volga region throughout history (the Scythians, the Bulgars, the Turks, etc.). One of the named peoples, the Variags, derived their name from varyag, the Slavic name for Norse adventurers and traders who traveled throughout Eastern Europe and Central Asia around the 10th to the 12th centuries.