Mike Collier in Riga -

When the Baltic Germans - many of whose families had lived in das Baltikum for 500 years or more - answered Hitler's call to return "home" in 1939, Latvian Prime Minister Karlis Ulmanis famously declared: "Let them go." Less than a century later, the sentiment is "Let them come."

In recent months, it seems the Baltic states in general, but Latvia in particular, have drifted in Germany's direction. While Estonia has buddied up with Finland thanks to the two countries' shared Finno-Ugric roots and Lithuania has been rediscovering its historic ties to Poland, Latvia has been less certain about which country could act as its big brother. Latvia's relationship with Sweden has soured thanks to the Swedish banks' role in the country's disastrous credit bubble and the other most obvious partner - Russia - is treated with understandable caution. But now with Europe's biggest economy proving its strength through the global economic crisis, Latvia, as the country that has fallen furthest and fastest in economic terms, regards Germany as an obvious teacher. Equally importantly, German leaders have been impressed by Latvia's path of Teutonic iron austerity to realign its economy - a stark contrast to the whining imprecations of Greece.

German Chancellor Angela Merkel said as much on September 10 in Riga. Latvia had "passed the test with flying colours," she declared. "We are allies in the European Union when it comes to solid financial policies and adherence to the EU's Stability and Growth Pact."

According to the coterie of German journalists who always travel with Merkel, her Baltic trip was the easiest they could remember. "There seems to be instant agreement on everything, and no nasty surprises at all - in fact it's quite boring," one senior correspondent told bne.

Friends indeed

While in Riga, Merkel addressed the German-Baltic Chamber of Commerce (AHK), many of whose members won praise locally for staying put when other investors chose to flee the troubled Baltic economies. Merkel wowed members with a slick 20-minute pep talk in a modest hotel conference room.

"It won't happen immediately, but these signals in Latvia and Germany are very important [for trade]," AHK director Maren Diale-Schellchmidt tells bne. "Like several other countries, Estonia, Latvia and Lithuania are perceived as strategically important markets by German companies. The current phase of consolidation offers new opportunities, especially for German companies which have not been active here as yet. German companies still have confidence and interest in the Baltic markets, shown by the positive comments and evaluations given in this year's business survey - about 80% would repeat their engagement here."

Crucially, much German investment involves the manufacturing and export industries the region needs to balance its books. Building materials firms such as Henkel (Estonia) and Heidelberg Cement (Lithuania) have opened state-of-the-art factories in recent months, while two days before Merkel's visit extraction firm Nordtorf cut the first sods in a new €6.5m peat substrate plant in eastern Latvia, which is by some measures the poorest part of the EU with 20% unemployment. "In a year, you won't recognise this place," founder Bernhard Steingrover told local press of the plans to turn a soggy bog into a modern factory.

In a sharply contrasting project, the city of Frankfurt is helping Riga plan a new 20,000-square-metre convention centre on a 36-hectare site near Riga airport. Operating through its Messe Frankfurt publicly-owned company, responsibilities range from the initial feasibility study and site analysis to market research. "For Messe Frankfurt, it is essentially a question of strategically expanding business fields. Within the Baltic states, Riga is a particularly attractive city for trade and industry owing to its geo-strategic location within the EU, its major seaport and its proximity to Russia," says Uwe Behm, Messe Frankfurt board member.

Going forward, German energy firms E.On and RWE are considered front-runners in an ongoing but secretive tender for construction of a nuclear power plant in Lithuania, which is likely to cost around €5bn. Another German firm, Nukem, is already responsible for ongoing decomissioning work at the now-defunct Ignalina nuclear plant.

Other smaller factors are playing a role in Latvia's German re-engagement, too. Prime Minister Valdis Dombrovskis spent time in Germany as a student and speaks the language, a fact that has helped him develop a rapport with Merkel, while German tourist numbers have risen by around 20% in the past year as they rediscover Riga's Hanseatic history and Jugendstil architecture. Many are surprised to hear Latvians with names like Å mits peppering their strange language with German-sounding words like bischen - a direct result of their centuries of overlordship.

And with Germany and Russia developing a close relationship, cultivating links with Germany may be a roundabout way of improving links to the east, particularly if little Latvia can convince the two giants to use it as a transit and trade route. An early taste of just such a situation came in September when German logistics giant DB Schenker and Russian Railways sister company TransContainer began operating a new joint depot on the outskirts of the Latvian capital capable of moving incoming cargo rapidly from Riga port to Russia.