Plaza and Louvre Treaties

The main topic of the fall meetings of the World Bank and IMF will be the effects of the impending recession on the global economy.

One of the main discussions is how the US Dollar, which has strengthened due to the Fed's interest rate hikes, will affect world trade. Some of the analyses on current developments can be found in the previous in the articles Let's go back to history in this article since it was written in 1960. My aim in frequently referring to history in my articles is to enrich the questions about today's developments.

In the 1970s, the world saw inflation and unemployment together for the first time. Stagnation and inflation occurred together and the concept of stagflation was defined.

The famous Latin American crisis in economic history began when Fed Chairman Paul Volcker raised interest rates to prevent inflation . However, another result also emerged: the dollar appreciated.

Between 1980 and 1985, the dollar gained approximately 50% of its value against the Japanese yen, German mark, French franc and British pound sterling. These countries constituted the five largest economies of the period.

The ratio of the US current account deficit to national income was around 3.5%. In addition, it was trying to cope with the problem of recession since the early 1980s. Volcker's interest rate decision was an attempt to take precautions against inflation, but American manufacturers, service sectors and farmers could not compete in international trade due to the valuable Dollar.

The countries with the above mentioned currencies came together at the Plaza Hotel in New York. They signed the agreement that became known in history as the Plaza Agreement . Accordingly, the central banks of the countries in question injected a total of $10 billion into international markets between 1985 and 1987. During the same period, the value of the Dollar against the Yen fell by 51%.

With this agreement, which was important for the US, the American economy gained international competitive power, but it could not achieve success in the Japanese market. Because Japan had made it difficult for goods to enter its domestic market with customs tariffs on imports. Therefore, although the dollar had lost significant value against the Japanese Yen, American goods could not enter the Japanese market and did not help the US economy gain international competitive power.

The strengthening of the Japanese Yen in international markets began to have negative effects on Japan. The strong Yen began to create recessionary effects on the Japanese economy. Japan had an economic structure dependent on exports, but due to its strengthening currency, it was unable to export enough.

The developments in the Dollar and Yen balance described above caused constant discussions between the US and Japan on the balance of payments, and also caused Japan to resort to expansionary monetary policies in order to weaken the appreciating Yen. Japan's expansionary monetary policies this time caused an asset bubble to form, and the Japanese recession, which went down in history as a case study, began.

When the depreciation of the dollar exceeded a certain balance point with the Plaza Agreement, other imbalances began to emerge. This time, the Louvre Agreement was signed by France, West Germany, Japan, Canada, the United States and England in order to stop the depreciation of the dollar and to stabilize the international foreign exchange market.

With the Louvre Treaty, France reduced the ratio of its budget deficit to national income to 1%, but tried to eliminate the effects of tightening fiscal policy that would slow down the economy with tax cuts for private companies and households.

Japan pledged to reduce its trade surplus and lower interest rates. Britain cut government spending and some taxes. West Germany also reduced government spending and introduced tax cuts for private companies and households. The United States pledged to reduce its 1988 budget deficit to 2.3% of national income from 3.9% in 1987. It also pledged to reduce government spending by 1% and keep interest rates low.

Following the Louvre Treaty, the dollar continued to lose value for a while. The exchange rate fell to 1.57 against the German Mark and 121 against the Japanese Yen. However, after the end of the 18-month appreciation period, the dollar's value against the Mark rose to 2.04 and against the Yen to 160. However, with the end of the dollar's decline, the Fed raised the interest rate from 6.50% to 9.75%. The 1980s were a period when rapprochement in international politics accelerated and tensions decreased. Today, the opposite process is taking place.

Today's global problems are much more serious than those of the 1980s. The climate crisis is in a very special place among the problems. Analyzing scenarios that will enrich the possibilities provides an intellectual contribution to the solutions that can be reached today.

According to the Plaza and Louvre Treaties, today there is an environment where monetary policies are much more prominent. However, it is seen in past examples that there are tools other than monetary policy. It is imperative that alternatives other than monetary policy are also on the agenda. Because trying to achieve results only with interest policies may lead to results that will reduce the effectiveness of monetary policies.