The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors)
was an agreement, signed on February 22, 1987, in
Paris
Paris () is the capital and most populous city of France, with an estimated population of 2,165,423 residents in 2019 in an area of more than 105 km² (41 sq mi), making it the 30th most densely populated city in the world in 2020. S ...
, that aimed to stabilize international
currency markets
The foreign exchange market (Forex, FX, or currency market) is a global decentralized or over-the-counter (OTC) market for the trading of currencies. This market determines foreign exchange rates for every currency. It includes all aspe ...
and halt the continued decline of the
US dollar
The United States dollar (symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the official ...
after 1985 following the
Plaza Accord
The Plaza Accord was a joint–agreement signed on September 22, 1985, at the Plaza Hotel in New York City, between France, West Germany, Japan, the United Kingdom, and the United States, to depreciate the U.S. dollar in relation to the French ...
.
It was considered, from a relational international contract viewpoint, as a rational compromise solution between two ideal-type extremes of international monetary regimes: the perfectly flexible and the perfectly fixed exchange rates.
The agreement was signed by
Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
,
France
France (), officially the French Republic ( ), is a country primarily located in Western Europe. It also comprises of Overseas France, overseas regions and territories in the Americas and the Atlantic Ocean, Atlantic, Pacific Ocean, Pac ...
,
West Germany
West Germany is the colloquial term used to indicate the Federal Republic of Germany (FRG; german: Bundesrepublik Deutschland , BRD) between its formation on 23 May 1949 and the German reunification through the accession of East Germany on 3 O ...
,
Japan
Japan ( ja, 日本, or , and formally , ''Nihonkoku'') is an island country in East Asia. It is situated in the northwest Pacific Ocean, and is bordered on the west by the Sea of Japan, while extending from the Sea of Okhotsk in the north ...
, the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, and the
United States
The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...
.
The
Italian government
The government of Italy is in the form of a democratic republic, and was established by a constitution in 1948. It consists of legislative, executive, and judicial subdivisions, as well as a Head of State, or President.
The Italian Constitutio ...
was invited to sign the agreement but declined.
Background
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
The is the official currency of Japan. It is the third-most traded currency in the foreign exchange market, after the United States dollar (US$) and the euro. It is also widely used as a third reserve currency after the US dollar and the e ...
and German
Deutsche Mark
The Deutsche Mark (; English: ''German mark''), abbreviated "DM" or "D-Mark" (), was the official currency of West Germany from 1948 until 1990 and later the unified Germany from 1990 until the adoption of the euro in 2002. In English, it was ...
, 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. The then U.S. Treasury Secretary
James Baker
James Addison Baker III (born April 28, 1930) is an American attorney, diplomat and statesman. A member of the Republican Party, he served as the 10th White House Chief of Staff and 67th United States Secretary of the Treasury under President ...
attempted to address the imbalance by encouraging its trade partners to stimulate their economies so they can purchase more from it.
He maintained that if these partners did not grow, he would allow the dollar's continued depreciation.
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%.
The ministers of the G7 nations gathered at the French finance ministry, then located inside the
Louvre Palace
The Louvre Palace (french: link=no, Palais du Louvre, ), often referred to simply as the Louvre, is an iconic French palace located on the Rive Droite, Right Bank of the Seine in Paris, occupying a vast expanse of land between the Tuileries Ga ...
in Paris, to minimize this decline and stabilize it around the prevailing levels.
The Louvre Accord may have helped prevent a recession because it stopped the US dollar from decreasing further in relation to other currencies.
Provisions
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. The United Kingdom would reduce public expenditures and reduce taxes. Germany, the real object of this agreement because of its leading economic position in Europe, would reduce public spending, cut taxes for individuals and corporations, and keep interest rates low. The United States would 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.
Impact
![US Dollar Index DXY](https://upload.wikimedia.org/wikipedia/commons/d/d4/US_Dollar_Index_DXY.webp)
The US 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
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
raising interest rates aggressively, from 6.50% to 9.75%.
References
{{Group of 8
Financial history of the United States
G7 summits
Foreign exchange market
History of international trade
Monetary policy
1987 in France