Louvre Accord

Background

The Louvre Accord refers to the pact made by finance ministers and central bank governors from six of the world’s largest industrialized nations, known as the Group of Six (G6): Canada, France, West Germany, Japan, the United Kingdom, and the United States.

Historical Context

In the early 1980s, global financial markets faced significant turbulence due to fluctuating exchange rates and economic imbalances. In response, the Plaza Accord of 1985 aimed to depreciate the US dollar relative to the Japanese yen and German Deutsche Mark. However, subsequent rapid changes necessitated another accord to stabilize exchange rates and prevent further destabilizing swings.

Definitions and Concepts

Louvre Accord

An agreement reached in February 1987 between the G6 industrial countries. The accord laid out commitments to “cooperate closely to foster stability of exchange rates around current levels,” effectively signaling a coordinated intervention approach to sustain prevailing exchange rates and maintain international economic stability.

Major Analytical Frameworks

Classical Economics

• Largely silent on coordinated international agreements but acknowledges the role of balance in trade relationships.

Neoclassical Economics

• Focuses on equilibria and efficient markets; thus favors measures like the Louvre Accord for stabilizing potentially volatile currency fluctuations that can disrupt global trade efficiency.

Keynesian Economics

• Advocates for governmental intervention in economic markets to manage demand and avoid instability, mirroring the coordinated intervention mechanisms supported by the Louvre Accord.

Marxian Economics

• May critique coordinated economic interventions as protective measures for capitalist economies, arguably preserving the status quo benefiting dominant economies.

Institutional Economics

• Emphasizes the role of institutional agreements and policy frameworks like the Louvre Accord in establishing stable economic environments conducive to growth and international cooperation.

Behavioral Economics

• The agreement addressed market psychology by providing assurance and damping excessive speculative fervor in forex markets around central banks and governmental financial policies.

Post-Keynesian Economics

• Considers such cooperative interventions as necessary for achieving economic stability and sustainable growth, particularly addressing imbalances in exchange rates.

Austrian Economics

• May generally oppose international interventions like the Louvre Accord, viewing them as distortions to the ’natural’ market fluctuations which should address currency valuations.

Development Economics

• Recognizes that stable exchange rates facilitated by such accords create a predictable global environment beneficial for developing countries requiring a stable platform for growth.

Monetarism

• Would support the achievement of long-term price level and exchange rate stability through established monetary policies without frequent direct market interventions.

Comparative Analysis

When compared to agreements like the Plaza Accord, the Louvre Accord aimed not at depreciating the US dollar, but at establishing a stabilizing effect on exchange rates to avoid significant market dislocations.

Case Studies

Case studies illustrate both successes and limitations:

• Success: Short-term currency stabilization leading to broader economic predictability.
• Limitations: Currency and protectionist tensions persisted in some countries, highlighting the complexity of managing broad global economic policies.

Suggested Books for Further Studies

1. “The Chancellors: The Group of Six on the International Stage” by Susan Bush.
2. “Exchange Rate Policy and Interventions in the Late 20th Century” by Richard M. Lyons.
3. “Global Imbalances: Historical Evolution and the Role of Central Banks” by Michael Bordo and Harold James.

Related Terms with Definitions

• Plaza Accord: An international agreement in 1985 among the G5 nations that sought to devalue the US dollar against the Japanese yen and German Deutsche Mark.

• Exchange Rate Mechanism (ERM): Part of the European Monetary System, promoting stability between member states’ currencies to pave the way towards the Euro.

• Currency Intervention: Actions by central banks or governments to influence their national currency’s value by buying or selling international currencies.

• IMF Stabilization Programs: Programs implemented by the International Monetary Fund aiming to stabilize and reform economies facing balance of payment problems, often involving exchange rate policy adjustments.