On April 29, Richard Clarida, former vice chairman of the Federal Reserve and global economic advisor for bond giant Pimco, published a column titled "The Real Lessons from the Plaza and Louvre Accords" in the Financial Times. In this article, he conducted an in-depth analysis of the Plaza Accord in 1985 and the Louvre Accord in 1987, and "corrected" the long-standing general perception about the factors behind the success of these two agreements.
Clarida stated that it is widely believed that the success of the Plaza Accord in 1985 and the Louvre Accord in 1987 was mainly due to coordinated intervention by various countries in the foreign exchange market, which led to the depreciation of the excessively strong US dollar at the time and reduced America's massive trade deficit.
However, he argued that this was actually a "myth," or a widespread misunderstanding.
Clarida emphasized that what truly played a decisive role was the adjustment of US domestic monetary and fiscal policies at the time.
Misunderstandings About the Plaza and Louvre Accords
The article first briefly reviewed the historical context during which the two agreements were reached.
In the mid-1980s, the US dollar exchange rate soared, and the US trade deficit also grew larger, accounting for approximately 3% of GDP, with domestic voices against trade protectionism becoming louder and louder.
To address this issue, in September 1985, the five major industrialized nations (G5) - the United States, Germany, Japan, the United Kingdom, and France - reached the "Plaza Accord" at the Plaza Hotel in New York, with the core objective being to act together and allow the US dollar to depreciate in an orderly manner.
Two years later, in February 1987, these countries signed the "Louvre Accord" in Paris. At this point, they felt that the US dollar had depreciated enough, so they decided to stabilize exchange rates instead and avoid excessive market fluctuations.
Looking back, these two agreements did achieve their goals: by 1987, the US dollar had indeed depreciated in an orderly manner; by 1989, the US trade deficit as a percentage of GDP had been reduced by two-thirds.
The article pointed out that because of this result, many people, including some professionals, believed that it was the joint intervention by central banks in the foreign exchange market (i.e., buying and selling US dollars) that led to the depreciation of the US dollar and the balance of trade.
Clarida bluntly pointed out that although this view was very attractive - after all, who wouldn't want to solve the trade deficit solely through coordinated foreign exchange intervention? - this view was actually incorrect.
He emphasized that empirical evidence and academic studies show that, although coordinated intervention was symbolically important, it was not the main driver of the depreciation of the US dollar between 1985 and 1987. The role of foreign exchange market intervention in this process was greatly overestimated, if not considered a "persistent myth."
The True Driving Force of the Plaza Accord - The US's Loose Monetary Policy
So, if it wasn't foreign exchange intervention, then what was the main cause of the depreciation of the US dollar? Clarida's answer was: the United States' own monetary policy.
He specifically mentioned then-Federal Reserve Chairman Paul Volcker:
"What really made the difference was the significant relaxation of US monetary policy under Volcker's leadership."
The article noted that when Volcker took office in 1979, he faced double-digit inflation, which he successfully brought down by the end of 1984. This meant that the Federal Reserve had substantial room for interest rate cuts. In fact, from October 1984 (eleven months before the Plaza Accord) to December 1986 (two months before the Louvre Accord), the Federal Reserve indeed cut interest rates dramatically from a high of 12% to 6%.
Clarida observed that the weakening of the US dollar occurred almost "in step" with these interest rate cuts. The logic behind this is not difficult to understand: when US interest rates decrease, the attractiveness of US dollar assets to international investors weakens, and funds naturally flow to other currencies with higher interest rates, leading to the depreciation of the US dollar.
Therefore, rather than saying that the "intervention" statements of the Plaza Accord had an effect, it was the Federal Reserve's actual interest rate cuts that changed the fundamentals of the market.
Fiscal Policy Plays a Key Role in Trade Balance
In addition to monetary policy, US fiscal consolidation also played a crucial role in reducing the trade deficit.
Clarida pointed out that although the Reagan administration implemented tax cuts and increased defense spending in 1981, in the following years, the government and Congress cooperated to implement several important fiscal tightening measures. Taken together, these measures reduced the US budget deficit by nearly 40%.
When the government spends less or taxes increase, overall economic demand cools down, including demand for imported goods, and reduces the need for foreign capital, all of which help improve the trade balance.
Clarida emphasized that critically, the initial Plaza Accord communiqué clearly emphasized that fiscal adjustments by the United States, Japan, and Germany would be necessary to reduce global trade imbalances, and at least in the US, these adjustments were indeed implemented.
Therefore, Clarida believes that policymakers must recognize that successful international coordination requires credible commitments at the monetary, fiscal, and geopolitical levels, rather than relying solely on foreign exchange intervention.
The Idea and Real Challenges of the "Mar-a-Lago Accord"
Having clarified history, Clarida turned his attention to the present.
Recently, with Trump's election as President of the United States, the so-called "Mar-a-Lago Accord" has gradually attracted much attention. This concept was proposed to draw on the experience of the Plaza Accord to address current trade issues.
The article also mentioned that economists such as Zoltan Pozsar and Stephen Miran, former chairman of the Council of Economic Advisers, have discussed the possibility of coordinating interventions to depress the US dollar exchange rate.
Even bolder ideas have been proposed, such as converting short-term US Treasury bonds held by foreign central banks into longer-term or even perpetual bonds, or linking currency cooperation with security arrangements and tariff reductions.
Then comes the question: since Clarida believes that the success of the Plaza Accord was mainly not due to intervention, can intervention under the current "Mar-a-Lago Accord" work?
Clarida's answer is obviously no. He argued that using the experiences of the Plaza Accord and the Louvre Accord to guide today must take into account the realities of the challenges.
First, the current monetary policy space may not be as large as it once was - for example, interest rates may already be low, or inflationary pressures may prevent central banks from cutting interest rates significantly;
Second, the prospects for fiscal consolidation are unclear, as governments around the world may face significant political resistance or heavy debt burdens; finally, the geopolitical environment is far more complex than in the 1980s, making coordination among major powers much more difficult now than before.
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