Here is one part of a longer essay:
The IMF thought the new Latvian government should respond to the crisis by devaluing the currency, the lat, which is pegged to the euro. Supposedly that would have restored competitiveness and growth. Staying on the peg would be costly and futile (Krugman said devaluation was a case of when, not if).
Almost the entire Latvian political class thought otherwise. Devaluation would bankrupt the many households who had borrowed in foreign currency. It would devastate the country’s reputation. It would actually do little for exports. Whether that was right or wrong, it was not a case of the IMF forcing medicine on an unwilling patient. (The IMF’s chief economist, Olivier Blanchard, now says that Latvia was right to shun devaluation.)
Good points, and on top of that I would stress a different angle. Latvia needs to prevent itself from being reincorporated into the Russian colossus. That is priority #1 by a long mile. That means doing everything possible to attach itself to the EU and eurozone, even if those policies might not otherwise be economically efficient. Iceland does not have a comparable problem, as it is nestled quite nicely in the north Atlantic and protected by the United States.
Criticizing Latvian economic policy without mentioning this constraint is missing the point, and recognizing that constraint makes their recovery performance look better.
Similarly, I am puzzled by the reports that Angela Merkel got “rolled” at the recent summit. My read was that she sees the current governments of Spain and Italy as the best working partners she is likely to get. They were offered benefits to take home to their electorates, while at the same time receiving a more subtle message that if they truly jump on board with cost internalization, as Ireland has done, they will be rewarded. (And yet, by the way, Germany still retains a future veto on how all that money gets spent, so no conditionality really has been relaxed, rather perhaps some power over conditionality was redistributed from the Troika to Germany, funny that.) Ireland of course was the big winner from the summit, as Irish bond yields plunged and the country’s situation suddenly looks much more tolerable. Ireland, like Latvia, is balancing both economic and foreign policy constraints.
I still doubt this new rescue plan can work, but at least it is more realistic than the “super fiscal policy” talk from various commentators. It does at least signal that new forms of aid will separate banks and sovereigns, though probably this is too little too late. And don’t expect the new euro bank regulator to be better than the old one, at least not anytime soon.