Signs you've gone on holiday to a fascist dictatorship

And what that means for the markets in Italy and Spain.

In 1969, as a nine year-old, the only real sign that we had gone on holiday to a fascist dictatorship was the policemen with machine guns walking up and down outside the hotel. The only other real sign was that Maria, my first true holiday love and our waitress at the Riviera Hotel Benidorm, would religiously count the number of chips each of us were given. Say what you will about Spanish fascism, it had the regularity and order of a well-run capitalist fast food outlet.

Meanwhile, across the Mediterranean, in Italy, they were about to embark upon "The Years of Lead" a roughly decade-long strategy of tension that would see both left and right-wing bombing and kidnapping campaigns designed to discredit their opponents and destabilize Italy. So serious was the threat, in 1990, the government of Giulio Andreotti revealed to Parliament the existence of "Gladio", NATO’s secret network of weapons readied should there be a communist coup in Italy.

Since the installation of King Juan Carlos I in Spain in 1975 and the creation of the First Republic in Italy after the Second World War both nations have designed political systems specifically to keep the extremes out of their politics – in the case of Spain it is fascism and, in the case of Italy, communism. The transition of, in particular, Spain to an unrecognizable modern democracy within a lifetime makes it almost inconceivable that either of these countries could return to their former roots. And yet as the financial crisis intensifies, the disenfranchisement of the young through unemployment and the loss of a stake in society re-ignites the 1899 words of Gustave Le Bon in The Psychology of Socialism when he says, "As soon as he has a family, a house, and few savings, the workman becomes immediately a stubborn Conservative. The Socialist, above all, the Anarchist-Socialist, is usually a bachelor, without home, means or family; that is to say a nomad…and barbarian."

Reinforcing the disenfranchisement, the contradictions within Europe are intensifying; German house prices are continuing to rise whilst Spanish property is still falling. Some estimates suggest that prices in Spain will decline between 10 and 30 per cent in the years to come, putting increased pressure on the banking system. Another cash injection can’t be ruled out. Some twenty billion euros from the European Stability Mechanism – equivalent to one year’s profits - would do the trick. In Italy property prices have hardly started to fall – they are only some six per cent down since 2010. But that isn’t the problem.

What is more worrying for the system is that the crisis that started in the property markets is now spreading to the funding of the small and medium-sized businesses which are the life blood of these nations. Euphemistically these are called "Non-Performing Loans" but to you and me they are businesses that can’t meet their debts because the economy is still in reverse gear. Larger companies have recognized this and are cutting out the banks (who can’t lend, won’t lend) and are going straight to the bond markets for their money. For smaller companies, a self-reinforcing spiral has been put in place at an employer level.  It’s also showing up in the habits of the eurozone as a whole – household borrowing has descended to a crawling pace and as we know capitalism can’t survive without a functioning credit cycle.

Problems in the banks will exclude the young from having a stake in society, as le Bon identified, which turns the financial crisis into a petri dish of social unrest. The post-war political structures of Italy and Spain were arguably put there on a "so-it-can’t-happen-again" basis. Powerful national democracies reinforced by semi-autonomous regional governments rife with self-interest and corruption makes it near-on impossible to have an electoral fascist or communist up-rising that would return them to their collective pasts. But also it creates a sclerotic system unable and unwilling to adapt and respond to crisis in a timely way. So it can’t be said that there won’t arise out of the intensification of the financial crisis a marked movement either to the left or the right in either or both of these countries borne out of a disenfranchised youth which spells trouble for their financial markets. At present both the Spanish and Italian bond markets are being held up by overt or covert market operations which is saving them from any form of real market analysis but this isn’t going to last and with it will come political change and even the end of the euro experiment.

Source: Bloomberg


Photograph: Getty Images

Head of Fixed Income and Macro, Old Mutual Global Investors

Photo: Getty Images
Show Hide image

Autumn Statement 2015: How should Labour respond?

The government always gets a boost out of big setpieces. But elections are won over months not days. 

Three days in the political calendar are utterly frustrating for Her Majesty’s Loyal Opposition – the Queen’s Speech, the Budget and the Autumn Statement. No matter how unpopular the government is – and however good you are as an opposition - this day is theirs. The government will dominate the headlines. And played well they will carry the preceding with pre-briefed good news too. You just have to accept that, but without giving in or giving up.

It is a cliche that politics is a marathon not a sprint, but like most cliches that observation is founded in truth. So, how best to respond on the days you can’t win? Go to the fundamentals. And do the thing that oddly is far too little done in responses to budgets or autumn statements – follow the money.

No choices in politics are perfect - they are always trade offs. The art is in balancing compromises not abolishing them. The politics and the values are expressed in the choices that you make in prioritising. This is particularly true in budgets where resources are allocated across geographies - between towns, cities and regions, across time - short term or long term, and across the generations - between young and old. To govern is to choose. And the choices reveal. They show the kind of country the government want to create - and that should be the starting point for the opposition. What kind of Britain will we be in five, ten, fifteen years as these decisions have their ultimate, cumulative impact?

Well we know, we are already living in the early days of it. The Conservative government is creating a country in which there are wealthy pensioners living in large homes they won, while young people who are burdened with debts cannot afford to buy a home. One in which health spending is protected - albeit to a level a third below that of France or Germany – while social care, in an ageing society, is becoming residualised. One where under-regulated private landlords have to fill the gap in the rented market caused by the destruction of the social housing sector.

But description, though, is not sufficient. It is only the foundation of a critique - one that will succeed only if it describes not only the Britain the Tories are building but also the better one that Labour would deliver. Not prosaically in the form of a Labour programme, but inspirationally as the Labour promise.

All criticism of the government – big and little – has to return to this foundational narrative. It should connect everything. And it is on this story that you can anchor an effective response to George Osborne. Whatever the sparklers on the day or the details in the accompanying budgetary documentation, the trajectory is set. The government know where they are going. So do informed commentators. A smart opposition should too. The only people in the dark are the voters. They feel a pinch point here, a cut there, an unease and unfairness everywhere – but they can’t sum it up in words. That is the job of the party that wants to form a government – describing in crisp, consistent and understandable terms what is happening.

There are two traps on the day. The first is narrowcasting - telling the story that pleases you and your closest supporters. In that one the buzzwords are "privatisation" and "austerity". It is the opposite of persuasion aimed, as it is, at insiders. The second is to be dazzled by the big announcements of the day. Labour has fallen down here badly recently. It was obvious on Budget Day that a rise in the minimum wage could not compensate for £12bn of tax credit cuts. The IFS and the Resolution Foundation knew that. So did any adult who could do arithmetic and understood the distributional impact of the National Minimum Wage. It could and should have been Labour that led the charge, but frontbenchers and backbenchers alike were transfixed by the apparent appropriation of the Living Wage. A spot of cynicism always comes in handy. In politics as in life, if something seems to be too good to be true then … it is too good to be true.

The devil may be in the detail, but the error is in the principle – that can be nailed on the day. Not defeated or discredited immediately, but the seeds planted.  

And, if in doubt, take the government at their word. There is no fiercer metric against which to measure the Tories than their own rhetoric. How can the party of working people cut the incomes of those who have done the right thing? How can the party who promised to protect the health service deliver a decade of the lowest ever increases in spending? How can the party of home ownership banish young people to renting? The power in holding a government to account is one wielded forensically and eloquently for it is in the gap between rhetoric and reality that ordinary people’s lives fall.

The key fact for an opposition is that it can afford to lose the day if it is able to win the argument. That is Labour’s task.