Louvre Accord

The 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.^[1] 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

The Plaza Accord aimed to depreciate the US dollar in relation to the Japanese yen and German Deutsche Mark, which was agreed upon at the G7 Minister of Finance meeting held in New York in 1985. The United States had a trade deficit. Japan and a few European countries were experiencing a trade surplus along with negative GDP growth.^[2] After the Plaza Accord, the dollar depreciated, reaching an exchange rate of ¥150 per US$1 in 1987. The ministers of the G7 nations gathered at the Louvre in Paris to minimize this decline. 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.^[3]

Provisions of the agreement

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.^[4]

Impact

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

1. "Statement of the G6 Finance Ministers and Central Bank Governors". University of Toronto G8 Centre. University of Toronto Library. Retrieved 11 November 2014.
2. Twomey, Brian. "The Plaza Accord: The World Intervenes In Currency Markets". Investopedia.
3. Niskanen, William A. "A Lower Dollar vs. Recession". The New York Times.
4. Feldstein, Martin. American Economic Policy in the 1980s. University of Chicago Press. pp. 306–309.