After years of rapid expansion, the economic situation in Iceland and Latvia turned for the worse when the country’s main banks collapsed and capital markets seized up. A direct consequence of the crisis is that Iceland and Latvia have entered a deep recession. The purpose of this article is to analyze economic development indicators of Latvia and Iceland from 2005-2010 and their economic strategies for stabilization of both economies. The analysis shows that following the failure of the banks, the contraction in all components of domestic demand deepened markedly. Deep cuts in employment and working time were made in both countries. Unfortunately the decision of government of Iceland to devaluate its currency didn’t allow avoiding havoc of public finances. Thus both countries were obliged to implement fiscal consolidation programme with tax rising and budget cuts. These economic strategies were not implemented according to the concept of effective demand of J.M.Keynes, but the latest statistics shows economic growth in both countries. Thus we can agree to J.M.Keynes saying that saving by institutions and through sinking funds is more than adequate, and that measures for the redistribution of incomes in a way likely to raise the propensity to consume may prove positively favourable to the growth of capital. But the question on the amounts of budget cuts is still open. The latest survey of International Monetary Fund estimates imply that a fiscal consolidation at amount of one percent of GDP reduces real private consumption over the next two years by 0.75 percent, while real GDP declines by 0.62 percent. Thus the government of Latvia shall do precise calculations and carefully consider above mentioned before further fiscal consolidation.