Hamish McRae: Let's focus on positives of foreign workers

If our economy is doing so badly why do so many people come here?

The UK is one of the few European economies that has a rising population and increasing workforce, which may well mean that Britain becomes the most populous European nation, passing Germany on the way down around 2050.

This, to be clear, is a longer-term issue. It is not related to the latest downward lurch in UK and European economic confidence that became more evident last week, as noted below. But longer-term issues matter, indeed almost by definition they must be more important than short-term ones and the latest migration figures from the Office for National Statistics paint a fascinating picture.

Some big numbers first. Roughly 600,000 people come into Britain as long-term migrants every year, while some 350,000 leave. So we have a net inward migration of 250,000 a year. Those figures have been pretty much the same for the past decade, through boom and slump, though they have if anything nudged up a little, for between 2001 and 2004 the annual net migration was under 200,000.

If you look at the nationality of migrants, there is a net outflow of British of around 50,000 a year, and a net inflow of 300,000 non-nationals. It varies from year to year but the general pattern is that out of that 300,000, some 50,000 to 100,000 are EU citizens, and 200,000 to 250,000 are non-EU.

This whole issue has, of course, become deeply political, with the Government under attack for not doing anything about it. But if you dig into the numbers, you see how difficult it is for any government to alter things. There are such strong economic and social forces driving inward migration that if you try to change things you risk damaging the economy.

That issue was highlighted not so much by the migration numbers but by the employment ones. At the moment total employment in the economy is flat. But the level of employment of non-nationals is rising by about 250,000 a year, while employment of nationals is falling by a similar amount. We don't really know the reason for that, through there have been plenty of knee-jerk reactions, usually regarding the lack of a work ethic among Britons. That seems to me to be an unhelpful line, partly because it leads to the "why should this be so?" question, and partly because the phenomenon is not only evident in Britain. Last week, I was chatting to a businessman in Germany who explained to me that his greatest problem was that younger people did not have a sufficient work ethic.

At any rate, the fact remains that foreigners are coming here for jobs and have continued to do through the recession. There have, however, been two shifts. As you can see from the main graph, the number of people coming in for work-related reasons has fallen a little from its peak in 2005 but it is still substantial. The dramatic shift is in the number of people coming to Britain to study, which has shot up from 100,000 to 250,000.

That has led to divergent comments. On the one hand it is a sign of success in a fast-growing industry in which the UK has a competitive advantage: higher education. On the other it has, to some extent, become a favoured path for immigration because people who study here frequently do so because they want to stay on and get a job. There has also, unfortunately but inevitably, been some fraud – bogus colleges.

If you look at reasons for emigration it is nearly always work. Very few people leave Britain for education, which may say something about the quality or expense of foreign universities, or it may simply be a cultural or language thing.

But what about Britons? Who is coming in and who is going out? The numbers are shown in the right-hand graph: the immediate thing that stands out is that emigration of Brits has fallen by one third since the boom, whereas immigration has barely budged. As a result the gap has come down sharply. One of the fascinating things to see in the next year or so will be whether significant numbers of Britons return from Europe. Anecdotally a lot of emigrants to Spain say that they want to return but can't because they can't sell their homes, but I find it more helpful to look at what people do rather than what they say. At the moment at least there is no substantial flow of people returning.

So those are some of the broad trends. What do they say about the economy? Three thoughts.

The first is that the UK job market is still something of a magnet. People come here for jobs and have gone on doing so despite the recession. There was of course a surge of people coming from eastern Europe after EU enlargement but that flow, while much smaller now, is still positive. Right through the slump there were more people coming in from the eight accession countries than were going back. True, the continued attraction of the UK job market may be a function of diminishing job opportunities elsewhere in Europe. But for whatever reason, the UK is still attracting foreign talent, something that should surely be encouraging.

The second is that our higher education industry is a tremendously important exporter, for that is what the surge in foreign students means. That needs a bit of thought. Strategically it must be an important benefit to have such a large share of the global student market, and financially too. But surely we should not see this simply as a cash cow to support universities that are under financial pressure. And if students want to stay and deploy their added human capital in our labour force, what then?

The third is that these trends are so embedded that we are not going to change them quickly. So we have to figure out how to deal with them better. Part of that will be to tackle the abuses more effectively and that is difficult for all sorts of reasons, good and bad. But part, also, is to focus on the benefits in an honest apolitical way, and see how we might boost those benefits still further.

Eurozone will have to shrink so Germany's burden can be eased

It has been a very difficult couple of weeks in the UK and in Europe, for business confidence in both has fallen, the markets have understandably reacted badly, and the latest run of economic data has been pretty negative.

Even if you believe that the GDP figures, now revised down, understate what has actually been happening in the first quarter, the outlook has undoubtedly darkened. So two questions.

First, has the downward jump in UK expectations been largely the result of what has been happening to the eurozone or is there something else that is going wrong?

I don't think we can answer that yet, but if there is not some sort of uplift in UK confidence in the next few weeks, the Bank of England might well have to figure out some way of pumping more money into the system.

Second, if the eurozone situation deteriorates further, as seems pretty inevitable, what will the leadership do?

There will be a short-term fix in that the European Central Bank will pump more money in, but there seem to be diminishing returns to that policy. If Germany were to agree to Europe issuing bonds under its joint name, with its guarantee explicitly tied to the country using the cheaper funds to carry through reforms and achieve targets, then that would help matters too.

But using Germany's credit-worthiness to support countries that could not borrow under their own name ratchets up the already huge contingency burden on the German people.

I get the feeling that Chancellor Angela Merkel wants a smaller eurozone, dropping the weaker countries off, but does not know how to achieve that without appearing to be a "bad European".

But a smaller eurozone is surely where this will end up.