6 Nations Agree on Stabilizing Dollar : Japan and West Germany Will Spur Economies to Cut U.S. Trade Deficit

Six leading industrial nations agreed Sunday on a pact aimed both at preventing a further decline in the U.S. dollar and at reducing the U.S. trade deficit.

But the accord was tarnished when Italy, angry over being excluded from earlier negotiations, walked out at the beginning of the formal closed-door session and threatened to cancel the seven-nation economic summit scheduled for Venice in June.

Under the agreement, West Germany and Japan promised to take additional steps to stimulate their weakening economies. The United States for months had urged such measures in the hope that, by boosting West German and Japanese demand for U.S. goods, the yawning U.S. trade gap could be narrowed.

U.S. Bows to Europe’s Pleas

In return, the Reagan Administration bowed to pleas from U.S. trading partners to prevent the dollar from falling further in relation to other currencies. The trading partners had complained that the sagging dollar, by effectively increasing the price of foreign goods sold in the United States, had sliced deeply into the sales of their major exporting companies.

“I am pleased with the agreement reached here today,” Treasury Secretary James A. Baker III told a crowded news conference at the ornate French Ministry of Finance, site of the talks. Later, Baker acknowledged in a briefing that the agreement requires the United States “to do what we can to foster stability around current (exchange rate) levels.”

Baker refused to discuss whether the United States would intervene in currency markets to support the dollar. “If there were a private agreement and I told you,” he said, “it wouldn’t be private any more.”

‘Concerted Intervention’

But Nigel Lawson, the British chancellor of the exchequer, told reporters that Baker has agreed that the United States is prepared to intervene when necessary. The senior economic officials, he said, had a “full discussion of the circumstances in which we would engage in concerted intervention.”

In a warning to currency traders who might want to bet against the finance ministers’ determination to stabilize the dollar, Lawson added: “Those who wish to speculate would have better luck with horses.”

The agreement forged at the weekend meeting, the culmination of weeks of behind-the-scenes negotiations aimed at stemming another abrupt plunge in the dollar similar to the sharp drop last month, is likely to be tested this week in foreign exchange markets, where hundreds of billions of dollars in currency change hands every day.

Before the meeting, many currency traders expressed doubt that officials from the top industrial democracies could produce a credible plan that would go beyond earlier pledges to cooperate in efforts to stabilize currencies and help bring down world trade imbalances.

But the pact appears to be more specific than expected on several points, and that should enhance the prospects that currency rates will settle down at more or less today’s levels.

40% Dollar Decline

The dollar has declined more than 40% against Japanese and major European currencies since its peak about two years ago.

In September, 1985, officials from the five leading industrial nations--the United States, West Germany, Japan, Britain and France--met in New York. They agreed to encourage the dollar’s fall in an effort to help narrow the U.S. trade deficit and reduce the corresponding trade surpluses in West Germany and Japan.

That agreement had the desired effect on the dollar, which has fallen since then from about 240 to 154 Japanese yen and from about 2.8 to 1.8 deutsche marks.

It also annoyed the Italians and Canadians, the other two industrial nations that attend annual economic meetings but had been excluded from the New York session. At last year’s economic summit, they won a pledge from the five other nations to be more directly involved in any future such government efforts to manage the international system of floating exchange rates.

Canada, which again this weekend was excluded from the sessions in which the agreement to stabilize the dollar’s value was hammered out, nonetheless joined in the pact. But Italian officials, in spurning the new arrangements, said they staged their sudden walkout because the decisions made Italy’s participation “residual.”

Italian Treasury Minister Giovanni Goria said that French Finance Minister Edouard Balladur, host of the meeting, brought a copy of the draft statement to him Saturday night after a dinner meeting among the five nations’ finance ministers and made it clear it was not subject to further negotiation.

“In light of that, the decision was easy to make,” Goria said. “We were superfluous.”

Italians Outraged

In Rome, outraged Italian leaders brandished the weapon of this June’s scheduled summit at which the heads of state of the seven nations, including President Reagan, are supposed to meet in Venice to discuss common problems.

“Italy is very disappointed by the behavior of the Five,” said Antonio Badini, diplomatic adviser to Prime Minister Bettino Craxi. He pointed out that Italy’s economy recently surpassed Britain’s as the fifth largest among industrial nations.

“This has put in doubt the credibility of the Five and industrialized countries’ summits,” Badini told Reuters news service. “How can we have a Venice meeting when this weekend’s events suggest it will serve no purpose?”

The Paris agreement apparently marks the end of the U.S. effort to encourage the dollar’s fall, a move that began 17 months ago to help shrink the U.S. trade deficit by making American goods less expensive in world markets and foreign products more expensive in the United States. The trade gap has recently shown signs of narrowing.

No ‘Reference Ranges’

The agreement stopped short of establishing formal “reference ranges,” or broad upper and lower limits on currency values, as Treasury officials had suggested privately to other nations in the past few weeks. West Germany and Britain opposed the concept because it might require governments to take actions that would be harmful to their economic health.

Key to U.S. acceptance of the accord, officials said, was West Germany’s decision to widen its planned 1988 tax cut to help stimulate its economy, which has practically stalled in recent months because of losses in export markets caused by the falling dollar. West Germany, however, did not agree to move up the tax cut to this year, as U.S. officials had requested.

Japanese Package

Also important was Japan’s agreement to prepare a comprehensive economic stimulus package later this year. If the Japanese economy continues to perform poorly, the statement suggested, the government would put the package into effect.

The Reagan Administration agreed to press ahead with efforts to reduce the federal budget deficit as a share of the nation’s economic output. But probably just as important, Baker said, is the Administration’s attempt, successful so far, to ward off protectionist legislation in Congress.

The looming dangers of a debt crisis with Brazil and Argentina played little role in this weekend’s deliberations, officials said.