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Group of Five economic pact could help halt dollar's slide

By Louise LiefSpecial to The Christian Science Monitor / February 23, 1987



Paris

The dollar's fall may slow down. Finance ministers from six leading industrialized countries announced a series of measures here yesterday intended to halt erratic currency swings and correct growing trade imbalances. Both Japan and West Germany agreed to try to implement tax reforms which would stimulate their domestic economies while the United States agreed to continue reducing its budget deficit.

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The agreement is intended to reassure international financiers that a measure of order would return to currency markets. Exchange rates, the ministers said, should remain ``around current levels.''

Whether the agreement will actually accomplish these goals remains unclear. Neither the Japanese nor West German measures will increase domestic demand in the short term, and the promised US budget cuts still will leave Washington with a yawning budget deficit.

Over the past two years, the dollar has declined more than 40 percent in value against the Japanese yen and major European currencies. At the same time, Japan and West Germany have toted up trade surpluses of $89 billion and $61 billion, against the record $170 billion US trade deficit.

The meeting of the so-called Group of Five - the US, Great Britain, France, West Germany, and Japan - was called to avert a possible monetary war between the nations. Canada also participated, but Italy withdrew from the meetings, saying it had not been consulted about major decisions.

Growing trade imbalances have caused rising friction between the US, Europe, and Japan. As the value of the dollar has fallen and the value of West German and Japanese currencies has risen, those two countries have found their exports becoming more expensive, and less competitive on the world market. Japan and West Germany are threatened with recession if the current trend continues.

The huge US trade deficit has contributed to a growing mood of protectionism in the US Congress. A weaker dollar is seen by some as one way of redressing the trade imbalance. In January, the dollar plunged further against other major currencies.

Many European economic analysts believe the US must make a clear commitment to cut its budget deficit.

In yesterday's agreement, US Treasury Secretary James Baker III restated Washington's commitment to reduce the 1988 budget deficit to 2.3 percent of GNP from an estimated level of 3.9 percent in fiscal 1987.

The West Germans and the Japanese, for their part, agreed to stimulate internal demand, which the US hopes will increase their demand for imports. Although West Germany refused to move up a scheduled $5.5 billion cut in personal income taxes to go into effect in January 1988, officials did agree to increase its size.

Japan cut its discount rate by half a point on Friday, bringing its key lending rate to a record low of 2.5 percent. Yesterday, Japanese officials pledged to try to implement a tax reform plan now before parliament.

Another idea reportedly discussed at the weekend meeting was a proposal, long touted by the French, to create reference ranges or target zones that would keep currency fluctuations within acceptable limits. Under this plan, central banks would have to intervene if currency fluctuations exceeded these limits. Mr. Baker denied such a solution was considered.