There have been two bad periods of boom and bust in the UK in the last thirty years. The first was the 1986-92 boom-bust cycle. The second was the bigger boom-bust of 2005-10.
They have several things in common. Both owed much to the influence of European policy on our economy. The first was wholly created by shadowing the DM at a time when the pound wanted to go up. This caused the authorities to print too much money, allow too much credit, and keep rates too low, in a desperate attempt to keep the pound down. Entering the Exchange Rate Mechanism sealed our fate. Soon the pound wanted to go down as there was too much inflation in the system. Then the government had to keep rates too high, destroy money and credit, and bring about a collapse.
The second was influenced by the idea of the independent Central Bank, again influenced by the German example. Perhaps the government believed that giving charge of rates and inflation to the Bank gave them a licence to borrow large sums to sustain rapidly rising public spending. They certainly did not follow the German example of prudence over public borrowing. Their banking regulation and other policies put us through an even more violent banking cycle. First there was a massive build up of credit and debts. Then there was a sharp contraction in money and credit, which undermined some of the banks.
The good news is that the UK has also enjoyed two periods within the last 30 years when it has followed a sensible economic policy. It shows it can be done. On both occasions it avoided magic boxes, European currency systems and independent Banks. Between 1981 and 1986 the UK economy recovered well from the 1970s boom-bust cycles. It entered a period of decent growth, low inflation and rising tax revenues. Public spending went up every year, but fell as a proportion of National Output. Public borrowing was brought under good control.
Between 1992 and 2000 the Uk enjoyed an even longer period of decent growth, low inflation, and public spending rising whilst coming down as a proportion of the economy. Public borrowing was brought under control, and in the final Labour years some debt was actually repaid.
So what can we learn from this? It is better to do what Germany did – control public spending and borrowing and pursue an honest money policy with targets for money growth – than to try to hitch a ride by following the DM or joining the Euro. When we followed a prudent path right for the UK it worked. When we sought independent or magic box solutions we suffered from violent cycles.