UK will tackle European migrants' benefits despite Merkel warning over Britain leaving EU, says George Osborne

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George Osborne today insisted that the Government would end the “unfair” exploitation of freedom of movement rules by migrant workers in the face of warnings from Germany that it could push Britain towards leaving the European Union.

Yesterday the German Chancellor, Angela Merkel, was reported as telling David Cameron she would be prepared to see Britain leave the EU rather than give in to his demands for new quotas on migrant workers coming to the UK.

Ms Merkel is understood to have told the Prime Minister he was approaching a “point of no return” where his demands for changes in Britain’s relationship with the EU were not acceptable to Germany.

But today Mr Osborne insisted that Berlin understood the “disquiet” in the UK about the issue of migrants coming from within the EU to potentially claim benefits and said he and David Cameron would act in the country's national interest.

Rather than quotas Downing Street is understood to be now looking at restricting migrant workers access to in work benefits – such as tax credits and child benefit – which make the UK such an attractive destination for foreign workers.

But senior Tory backbencher David Davis increased the pressure on Mr Cameron to secure major changes to EU free movement rules by warning that reform to benefits rules would not be “enough”.

“It's got to be a change in the so-called free movement rules to take on board that sometimes one country has an average wage one eighth of another country and therefore if you don't do something there is going to be a massive flow from one to the other,“ he said.

Mr Osborne told the BBC he had “good discussions” with the Germans in recent days and they understood the UK's position.

Mr Osborne, who dismissed the reports of Mrs Merkel's comments as speculation, said: “We have had good discussions with the Germans; I was in Berlin just a few days ago myself.

“They understand the disquiet that is caused amongst British people when you have people coming in from other parts of Europe here, to claim our benefits, who don't necessarily have jobs to go to.

“This is creating a huge pressure on public services, the British public want this addressed.

“So we are going to do this in a calm and rational way, but the British people want this addressed, we are employed by the British people, and that's what we are going to do.”

He continued: “What we are going to address is the question of how the freedom of movement operates in the 21st century.

“It was never envisaged that you would have such large numbers of people coming, people coming who don't have job offers, people who move on to our benefits system - although we have been able to tighten that up in recent months, but it's still the case that they can do that - and that causes a lot of public unhappiness, because they think it's unfair and of course these are welfare payments paid for by hard-working taxpayers.”

Capitalising on the row Nigel Farage insisted the Germans “don't bluff” and claimed Mrs Merkel would rather Britain leaves than renegotiate EU treaties.

“Mr Cameron was pushed, I think by Ukip's success in Clacton, into extending his renegotiating position into saying we should renegotiate freedom of movement. It isn't going to happen.

“My experience of Brussels politics is that the Germans don't bluff. They are very straightforward, they really do say what they think and Mrs Merkel would rather Britain left the European Union than those treaties started to be unpicked.”

He added: “Mr Cameron will try and fiddle around at the edges. What he will not be able to do is to change the basic principle that nearly half a billion people if they want can come to this country. That isn't going to change.“

Shadow Foreign Secretary Douglas Alexander said: "These comments by a German government spokesperson reveal that David Cameron is both losing influence and losing allies in Europe.

"His weakness within his own party means he now risks pushing Britain towards exit from Europe altogether.

"The right road for Britain is reform within Europe, not exit from Europe.

"Britain needs leadership on Europe which puts jobs, investments and the national interest first. It's clear that is not what we are getting from David Cameron."