Interesting post by Ed Hugh at Fistful of Euros on austerity in Latvia... goes somewhat beyond the usual point that the "success" of austerity in the Baltic republics (in the sense that they are not considered to be in imminent danger of defaulting on their debt, and in the sense that GDP is again growing) has come at the cost of enormous drops in GDP (which the current growth in GDP has still not made up).  Krugman is also good on this, but Hugh's post goes into a lot of detail and argues that even in terms being able to pay their debt, things may not look so good in a few years.

What's basically been going on is "internal devaluation", i.e. massive wage and price deflation, in order to reverse the decline in competitiveness that followed Latvia's pegging its currency to the Euro.  This has been accomplished in part by austerity that has been extremely contractionary, and has resulted in a massive shift toward exporting by the Latvian economy, earning it foreign exchange with which to pay euro-denominated debt.   But the huge cost in macroeconomic contraction might have been partially avoided by devaluing instead of maintaining the peg (although massive devaluation, while macroeconomically stimulative through the export demand channel, may in some circumstances cause macro problems as well...).