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

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Why Theresa May can't end speculation of an early general election

Both Conservative and Labour MPs regard a contest next year as the solution to their problems. 

One of Theresa May’s first acts as a Conservative leadership candidate was to rule out an early general election. After a tumultuous 2015 contest and the EU referendum, her view was that the country required a period of stability (a view shared by voters). Many newly-elected Tory MPs, fearful of a Brexit-inspired Ukip or Liberal Democrat surge, supported her on this condition.

After entering Downing Street, May reaffirmed her stance. “The Prime Minister could not have been clearer,” a senior source told me. “There won’t be an early election.” Maintaining this pledge is an important part of May’s straight-talking image.

But though No.10 has wisely avoided publicly contemplating an election (unlike Gordon Brown), the question refuses to die. The Conservatives have a majority of just 12 - the smallest of any single-party government since 1974 - and, as David Cameron found, legislative defeats almost inevitably follow. May’s vow to lift the ban on new grammar schools looks to many like an unachievable task. Former education secretary Nicky Morgan and former business minister Anna Soubry are among the Tories leading the charge against the measure (which did not feature in the 2015 Conservative manifesto).  

To this problem, an early election appears to be the solution. The Tories retain a substantial opinion poll lead over Labour, the most divided opposition in recent history. An election victory would give May the mandate for new policies that she presently lacks.

“I don’t believe Theresa May wishes to hold an early election which there is evidence that the country doesn’t want and which, given the current state of the Labour Party, might be seen as opportunistic,” Nigel Lawson told today’s Times“If, however, the government were to find that it couldn’t get its legislation through the House of Commons, then a wholly new situation would arise.”

It is not only Conservatives who are keeping the possibility of an early election alive. Many Labour MPs are pleading for one in the belief that it would end Jeremy Corbyn’s leadership. An early contest would also pre-empt the boundary changes planned in 2018, which are forecast to cost the party 23 seats.

For Corbyn, the possibility of an election is a vital means of disciplining MPs. Allies also hope that the failed revolt against his leadership, which Labour members blame for the party’s unpopularity, would allow him to remain leader even if defeated.

Unlike her predecessors, May faces the obstacle of the Fixed-Term Parliaments Act (under which the next election will be on 7 May 2020). Yet it is not an insurmountable one. The legislation can be suspended with the backing of two-thirds of MPs, or through a vote of no confidence in the government. Alternatively, the act could simply be repealed or amended. Labour and the Liberal Democrats, who have demanded an early election, would struggle to resist May if she called their bluff.

To many, it simply looks like an offer too good to refuse. Which is why, however hard May swats this fly, it will keep coming back. 

George Eaton is political editor of the New Statesman.