The Plaza Accord Cannot Be Reincarnated
by Carl Tannenbaum and Asha Bangalore, Northern Trust
The Plaza Hotel in Manhattan is a landmark property. Standing at the foot of Central Park for more than 100 years, the Plaza has hosted presidents, kings, and entertainment's leading lights. The hotel was featured in The Great Gatsby, and was the setting for films ranging from North by Northwest to Home Alone II. Donald Trump was married there in 1993.
Despite what "The Donald" would tell you, that was not the most significant gathering in the hotel's history. Thirty-one years ago, the finance ministers from Japan, France, West Germany, Britain and the United States met to synchronize economic policy in support of global objectives. The "Plaza Accord" set the stage for significant shifts in world markets.
Today, some are calling for a new Plaza Accord. Countries acting in isolation are not getting the economic results they are seeking, and their actions create stress for their neighbors. But while a new commitment to coordination would be ideal, securing it may be a bridge too far.
The world was a different place in the middle of the 1980s. Walls still hadn't fallen, Europe still had multiple currencies, and China's economy was one-tenth the size of the United States'. But globalization was advancing, and with it the notion that collective success could be achieved through collective behavior.
When officials gathered at The Plaza in 1985, they were intent on addressing a very specific issue. The U.S. dollar had been gaining alarming strength, nearly doubling in value on a trade weighted basis in five years. That made U.S. exports substantially more expensive, initiating a rise in the U.S. trade deficit that had reached a then unheard-of level of 2.5% of gross domestic product (GDP).
Accusations of manipulation were rampant. Japan, which was in ascendance, was thought to be holding down the value of the yen to promote sales of its products overseas. The U.S. Congress was under pressure from American manufacturers to retaliate with trade restrictions.
The five signatories to the Plaza Accord (known then as the Group of Five, or G-5) agreed to intervene in currency markets to drive down the U.S. dollar. Over the next two years, the U.S. dollar declined by almost half versus the British pound, the West German mark, and the Japanese yen. The trade picture responded in turn; the U.S. import/export position returned to near balance before the decade was out.
The Plaza Accord is still revered as a shining example of what international policy coordination can achieve. To build on this initial momentum, the conclave was widened to become the G-7, a group which still meets today. Some have said that the success of the Plaza Accord helped boost prospects for the euro, which is the ultimate expression of economic cooperation between sovereign nations.
These fond memories have spurred calls for a new Plaza meeting. Some would like a conclave to discourage currency manipulation, a potential race to the bottom which might leave everybody worse off. (There have been suggestions that G-20 members moved to restrict this activity in Shanghai earlier this year, although the turn in exchange rates can be traced to late last year.)
But the reality of what happened 30 years ago is much more complicated, and the spirit of cooperation which prevailed back then would be difficult to recreate. A careful reading of the history suggests that a new Plaza Accord might not be very effective.