Louvre Accord

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The Statement of the G6 Finance Ministers and Central Bank Governors,[1] commonly known as Louvre Accord was an agreement, signed on February 22, 1987, in Paris, that aimed to stabilize the international currency markets and halt the continued decline of the US Dollar caused by the Plaza Accord from 1985.[1] It is considered - from a relational international contract view, as a rational compromise solution between two ideal-type extremes of international monetary regimes: the perfectly flexible and the perfectly fixed exchange rates.[2]

The agreement was signed by France, West Germany, Japan, Canada, the United States and the United Kingdom.[1] The Italian government was invited to sign the agreement but declined.[1]

Background[edit]

The Plaza Accord is recognized as the precursor to the Louvre Accord and this deal was struck to depreciate the US dollar for the purpose of exchange rate realignment with the Japanese yen[3] and German Deutsche Mark, which was agreed upon during the G7 Minister of Finance meeting held in New York in 1985. The United States had a trade deficit while Japan and a few European countries were experiencing a trade surplus along with negative GDP growth.[4] The then U.S. Treasury Secretary James Baker attempted to address the imbalance by encouraging its trade partners to stimulate their economies so they can purchase more from it.[5] He maintained that if these partners did not grow, he would allow the dollar's depreciation.[5]

After the Plaza Accord, the dollar depreciated, reaching an exchange rate of ¥150 per US$1 in 1987. By this time, the nominal dollar exchange rate against other currencies had fallen more than 25 percent.[5] The ministers of the G7 nations gathered at the Louvre in Paris to minimize this decline and stabilize it around the prevailing levels.[5] The Louvre Accord may have helped prevent a recession because it stopped the value of the U.S. Dollar from decreasing any further in relation to other currencies.[6]

Provisions of the agreement[edit]

France agreed to reduce its budget deficits by 1% of GDP and cut taxes by the same amount for corporations and individuals. Japan would reduce its trade surplus and cut interest rates. Great Britain would agree to reduce public expenditures and reduce taxes. Germany, the real object of this agreement because of its leading economic position in Europe, would agree to reduce public spending, cut taxes for individuals and corporations, and keep interest rates low. The United States would agree to reduce its fiscal 1988 deficit to 2.3% of GDP from an estimated 3.9% in 1987, reduce government spending by 1% in 1988 and keep interest rates low.[7]

Impact[edit]

The dollar continued to weaken in 1987 against the Deutsche Mark and other major currencies, reaching a low of 1.57 marks per dollar and 121 yen per dollar in early 1988. The dollar then strengthened over the next 18 months, reaching over 2.04 marks per dollar and 160 yen per dollar, in tandem with the Federal Reserve raising interest rates aggressively, from 6.50% to 9.75%.

References[edit]

  1. ^ a b c d "Statement of the G6 Finance Ministers and Central Bank Governors". University of Toronto G8 Centre. University of Toronto Library. Retrieved 11 November 2014.
  2. ^ Giersch, Herbert (2012). Money, Trade, and Competition: Essays in Memory of Egon Sohmen. Berlin: Springer-Verlag. p. 60. ISBN 9783642772696.
  3. ^ Takagi, Shinji (2015). Conquering the Fear of Freedom: Japanese Exchange Rate Policy Since 1945. Oxford: Oxford University Press. p. 157. ISBN 9780198714651.
  4. ^ Twomey, Brian. "The Plaza Accord: The World Intervenes In Currency Markets". Investopedia.
  5. ^ a b c d Reinert, Kenneth; Rajan, Ramkishen (2009). The Princeton Encyclopedia of the World Economy. (Two Volume Set). Princeton, NJ: Princeton University Press. p. 746. ISBN 9780691128122.
  6. ^ Niskanen, William A. "A Lower Dollar vs. Recession". The New York Times.
  7. ^ Feldstein, Martin. American Economic Policy in the 1980s. University of Chicago Press. pp. 306–309.