The FT has a nice piece on Latvia this morning. To my mind the most interesting sentence in it was the following:
IMF officials have indicated that the organisation was divided over the wisdom of defending the lat’s peg but was finally persuaded by pressure from Riga’s EU partners as well as the Latvian government’s own refusal to contemplate devaluation.
If there is one thing we have learned about international currency markets in the past couple of decades, it is that fixed exchange rates and internationally mobile capital don’t sit well together. A European response to this general lesson has been to go for full monetary integration — EMU — rather than stick with unstable intermediate arrangements such as the EMS.
There are logical consequences for how we deal with Latvia. If the country’s EU partners don’t want it to devalue, they should offer it immediate EMU membership. If they don’t do this, then we can probably leave aside the normative point that Latvia ought in its own interests devalue, since as a positive matter it will almost certainly be forced to be. As this article points out, a forced devaluation would have repercussions far beyond Latvia. It would be nice to avert a crisis before the fact rather than after it, for once.