The Louvre Accord (formally, the Statement of the G6 Finance Ministers and Central Bank Governors) 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, France, West Germany, Japan, the United Kingdom, and the United States. and German Deutsche Mark. 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 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.
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
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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 raising interest rates aggressively, from 6.50% to 9.75%.