We are, quite rightly, rolling out the red carpet for Angela Merkel this week – for not just a day of bonding with David Cameron but an address to the joint Houses of Parliament, no less. The aim of the visit from our point of view will be to get German support for European Union reform, or at least to establish where there is common ground between us. The aim from the German point of view is to help Britain stay in the EU.
That is over-simplifying of course, but you see the point. Germany is the great economic anchor of the eurozone, but as Angela Merkel herself noted in a speech last year, Germany's strength is not infinite. The country needs successful neighbours, and while Britain is third to France and the United States as a destination for German exports, it is the largest export market for the eurozone as a whole. By contrast, for the first time since the 1970s we are now exporting more to non-European countries than we are to Europe. Nevertheless, we too need a successful Europe and the key to that is Germany.
Beyond this obvious common interest, there is something else. Germany and the UK have the strongest job markets in Europe. In terms of economic growth the UK is at last starting to outpace Germany, but for the past three years the UK and Germany have been the only significant sources of new jobs in Europe. We are similarly competing for top talent; Germany eased its regulations on highly skilled workers from outside the EU some 18 months ago, and earlier this month Cameron announced modified visa requirements for people with "exceptional talent". This takes effect in April.
One of the fascinating things that has happened in the EU over the past five years is that we have moved some way towards a single market in labour. People move between countries for jobs in a way that would have been almost unthinkable 10 years ago. We see that in the UK, where roughly one in three of the jobs created over the past year goes to people born elsewhere.
Germany is the second-largest destination for EU migrants. If the magnet of opportunity is attracting people to the stronger economies, the lack of opportunity is expelling people from countries such as Italy and Spain. Italian emigration was 68,000 in 2012 (we don't yet have figures for 2013), while Spain is projected to lose more than 200,000 a year for the next decade. Of course, not all the people leaving southern Europe are highly skilled, but the figures contain an alarming statistic for Italy. One-quarter of the people leaving the country have degrees.
A true single European market for labour does not yet exist because there are all sorts of frictions, including language, professional qualifications, and so on. But we have enough of one now to see what sort of EU we are moving towards. It is a world of winners and losers. There are three main features to this.
First, the weight of the European economy is shifting from the periphery to the core. The general movement is north – away from the Mediterranean – but it is not as simple as that, for within the UK the move is to London and the South-east.
Populations are moving, creating greater physical pressure on the winning areas, in infrastructure, housing and so on. We are very aware of that in London and one of the great challenges for the UK will be how to cope with that in a decent and socially acceptable way. We are less aware of the consequences of depopulation. To see that, you need to go to the half-built housing estates in Ireland and Spain.
Second, this is a Europe for the highly skilled. They are mobile and they are moving. That puts more pressure on governments to improve the skills of their workforce, but this is an achingly slow process. Even Germany, with its system of technical education developed over several generations, is struggling to fill skill gaps. A Europe that works for the skilled but not for the less-skilled may be an inevitable outcome of global economic change, but it is not one that its citizens will easily accept, particularly since the European welfare model is unsustainable. As Merkel noted, Europe's problem is that it accounts for 7 per cent of the world's people, 25 per cent of its GDP and 50 per cent of its social spending.
That leads to the third winner/loser distinction, less obvious right now but potentially the most corrosive of all: could it be that Europe as a whole will be a loser? It is inevitable that its economic weight in the world will tend to shrink, but it should be possible, despite the headwind of ageing populations, to go on increasing the living standards of most of its citizens. But you can't do that with the levels of unemployment prevalent in much of the eurozone. Were the idea that Europe is a loser to take hold, then … well, let's not go there just yet.
It is however this Europe of winners and losers that Cameron and Merkel have to confront. They represent the two most successful large economies of the region, both with rather different problems, but both with great opportunities.
I suggest that the cautious, thoughtful Chancellor has much to teach the intuitive, intelligent Prime Minister, but maybe something to learn too.