The Bretton woods system had worked at least for two consecutive decades in the post war period until its disruption when the gold standard was replaced by the dollar. But when it failed, it was not immediately obvious what would replace it. The floating exchange rates prevailed, particularly for major currencies, dollar, yen and D-mark. Then came a long period of low inflation and steady growth because of the growth of India and China which created a supply shock to put dowward pressure on prices. Deflationary tensions were avoided temporarily by a loose monetary policy that encouraged asset bubbles which eventually led to the current financial crisis.
Some Western governments (in particular britain and the US) have huge trade as well as budget deficits and will have to pay a price in terms of higher taxes to meet the interest of the debt and the claims of foreign creditors. The Economist (14 May) writes: 'Creditor nations tend to set the rules and the new global monetary system will be unable to operate without the approval of China, a creditor country that controls and a managed currency. It has been assumed that China will have to move towards the western model. But why not the other way round?
It is perhaps premature to say that a new global order is coming into existence, but this will not happen without China, and possibly India, Russia and Brazil, which are trying to increase their influence over the so-called 'Western world'. The significance of this major shift in the balance of power is that there has been a process of correction in which the powerful nations are not anymore in a position to set the rules for the rest of the world.
Our hope is that these corrective forces - with the rise of globalisation and new economic powers- will contribute (paradoxally) to establish a more democratic international order. Along with this, we need stronger international institutions to set new economic rules to promote well being, high employment and sustainable growth. But also a new political framework, including rules to enforce respect of human rights, especially for citizens from weaker states (asylum, refugees, migrations,..). It's all about the future of mankind, not only the interests of the strong.