ORESTE: Goodbye, and behave yourselves because these are hard times. Hard, hard times!
GUIDO: They're hard times? Why, what are your political views?
ORESTE: Benito! Adolf! Be good! What did you say?
GUIDO [hesitates]: I said, how are things going?
The war is a bit of a relief pitcher in this film. During the first half of the movie, it mostly hangs out in the pen, throwing warmup pitches and waiting for its time to jump into the game. Still, we get a few glimpses of what's to come.
Here, we learn that Oreste named his sons Benito and Adolf (read: Benito Mussolini and Adolf Hitler). Oreste seems like a perfectly nice guy; he even goofs with Guido over his hat. So this is a pretty ominous sign that even normal people are becoming Nazi sympathizers.
GUIDO [laughing]: Naturally! Our race is superior. I've just come from Rome, right this minute to come and tell you in order that you'll know, children, that our race is a superior one. I was chosen, I was, by racist Italian scientists in order to demonstrate how superior our race is. Why did they pick me, children? [Jumps up onto the table.] Must I tell you? Where can you find someone more handsome than me? Justly so, there is silence. I'm an original "superior race," pure Aryan.
Another hint of things to come. Before Guido showed up to mac on Dora, these children were going to receive a state-sanctioned lesson on their racial superiority. Yeah, that was an actual thing in 1930s Europe.
See, Mussolini and Hitler convinced their respective countries that their race was superior and that others—notably Jews, Blacks, and Slavs—were inferior. "Untermenschen"—subhumans—was the word they used. Of course, convincing your citizens that they are racially, therefore also morally, superior is an effective way to psych them up for war.
Guido's hilarious lecture is a send-up of that wrong-headed idea. If you want to read more on the Nazi ideology of race, the U.S. Holocaust Memorial Museum has a lesson on that.
MAESTRO: And now, ladies and gentlemen, a magnificent surprise offered by the Grand Hotel. The Ethiopian cake!
This not-so-subtle cake is a subtle reminder that Italy's already at war. The Italo-Ethiopian War saw Italy invade Ethiopia and take occupation of the country under Italian rule (Source).
That war was one of the lead-ups to World War II and came at the height of fascism's popularity in Europe. Essentially, the Italians wanted to have conquest cakes that belonged to other people and eat it too.
GUIDO: That's it! It's that game where…it's the game…we're all players. It's all organized. The game is the men are over here, the women are over there. Then there's the soldiers. They give us our schedule. It's hard, you know. It's not easy. If somebody makes a mistake, they get sent right home. That means you have to be very careful. But if you win, you get first prize!
JOSHUA: What's the prize?
GUIDO: Uh, first prize!
ELISEO: It's a tank.
JOSHUS: I already have one.
GUIDO: This one's a real tank. Brand new!
Boys play war games all the time. It was a thing even before Call of Duty. Guido uses this to his advantage: he turns the real war into a game to hide the truth from his son.
JEWISH WOMAN: That one's new. She learned right away. The lady at the door, she seemed nice when she first came. She's the worst of all!
DORA: At least she didn't send the old ladies and children to work.
JEWISH WOMAN: They don't send old people and kids to work because they kill them. One of these days they'll call them to take a shower. "Children, shower time!" The truth is, they make them shower there in the gas chamber.
There are agreed-upon rules to war, and not attacking, enslaving, or exterminating civilians are a few of them. The Nazis ignored the rules. The very old and very young were useless to the Nazis, because they couldn't work. They were usually separated from the rest of the prisoners and killed within hours of arriving at the camps.
If there's any upside to this truth (and there really isn't, but bear with us), it's the Nuremberg Principles. These guidelines were enacted in 1945 by the International Law Commission to clarify the guidelines for the Nuremberg Trials—the trials that prosecuted Nazi war criminals. They include listing acts of murder and enslavement against civilian populations a war crime and a crime against humanity (Source)
GUIDO: Come here. Where are we here? I might have taken the wrong way. Good boy, sleep. Dream sweet dreams. Maybe it's only a dream! We're dreaming, Joshua. Tomorrow morning, Mommy will come wake us up and bring us two nice cups of milk and cookies. First, we'll eat. Then I'll make love to her two or three times…if I can.
Guido comforts his son (and maybe himself) as they walk through the fog, only to come upon a mountain of corpses. This scene takes artistic license with the history. While piles of victims were found, the Nazis mostly cremated their victims or buried them in mass graves in an attempt to hide the evidence of their crimes.
Here, the image is meant to show the weight of the situation Guido faces in trying to hide these horrors from his son. Being a patriotic citizen of Italy, Germany, The Netherlands, or anywhere in Europe, and suddenly finding yourself in a death camp must have seemed like a nightmare from which you'd desperately want to wake up. Guido's dreams of his sweet former life are definitely tear-jerking.
[With Joshua watching from his hiding place, Guido playfully goosesteps as the soldier marches him around a corner. Both Guido and the soldier turn the corner. We hear machine gun fire, and the soldier returns alone.]
Guido becomes a victim of the war. Faced with certain death, he can't defend himself against the soldier's savage force. He can only protect his son's spirit. In this way, the soldier can kill Guido, but he can't defeat him.
JOSHUA: We won!
DORA: Yes, we won!
JOSHUA: A thousand points to laugh like crazy about! We came in first! We're taking the tank home! We won!
Without firing a single shot, Guido "wins." His son and wife are safe, and his son's love of life hasn't been destroyed.
Obviously, the reality of the Holocaust and World War II was very different than what is presented in Life Is Beautiful. Two-thirds of Europe's Jews, and tens of millions of other civilians and military forces, were killed. But there were many instances of—pardon the cliché—the triumph of the human spirit, and this is what the film wants to show us.