Latvia faced the unwinding of its huge deficits in the context of a comprehensive global crisis that had forced its regional competitors in Poland, Hungary and Romania to devalue. If the Baltics did not follow suit, how were they to keep up? How would they cope without foreign funding? How could they regain export competitiveness and shrink imports if they could not adjust their currencies against the euro? Without devaluation the only way to right the trade balance was by rebalancing domestic demand, cutting wages, raising taxes and slashing government spending.
