Markets bounce on Boris Johnson victory - is the optimism justified?

Labour has been trounced. The party’s plans for nationalisation are dead; the financial transaction tax is gone; large companies will not have to gift shares to their workforce; businesses and high earners will not have to pay higher taxes.

Boris Johnson has a resounding mandate to lead and a majority that enables him to be bold should he choose to be.

The pound rose three cents against the dollar within minutes of the exit poll being published, the FTSE 250 hit another record high on Friday morning as investors bought up shares in house builders, banks, airlines and other companies whose fortunes are closely tied to the performance of the UK economy.

Is the optimism justified? Much depends on the ability of Johnson to deliver on the promises he has made. Brexit is not yet done and still won’t be done when the UK leaves the European Union in January.

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Johnson has pledged to negotiate, ratify and implement an “ambitious” and “deep” and “comprehensive” trade deal with the EU, our largest trading partner. He has made a manifesto commitment to do so before the end of 2020 when the transition period expires.

The negotiations will be tough. The EU has indicated a willingness to offer tariff and quota free access but in return it will want the UK to make binding commitments on workers rights, state aid and environmental standards. It will demand access to UK coastal waters.

Supporters of Brexit may find these things hard to stomach. They might feel that if Johnson were to agree that he would be signing up to precisely the sorts of restrictions they are keen to throw off.

By agreeing to march in step with the EU’s rules and regulations Johnson would also be potentially locking himself out of trade deals he wishes to strike elsewhere in the world.

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The size of Johnson’s majority should mean he'll find that Parliament falls into line but attitudes across the Channel are likely to harden.

With all hope of the UK remaining now extinguished, the EU will no longer feel the need to tread carefully. The timeline to secure a trade agreement is tight and remember every member state has a vote and therefore a veto.

In a year’s time, the UK may be on the verge of signing a trade deal with the EU that looks anything but “deep” and “comprehensive” and we may face the prospect of no deal at all. The former would hardly enhance our future prosperity, the latter would greatly damage it. The markets are unlikely to welcome either outcome.

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