Britain leapfrogs Germany in list of world's most prosperous nations... but still lags behind Norway, Australia and Iceland

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Britain has leapfrogged Germany to become the most prosperous of all major European Union countries.

As David Cameron battles with Angela Merkel over his plans to curb EU immigration, the Prime Minister has been boosted by news that the UK is one of the best places to work and do business.

Legatum Institute's 2014 Prosperity Index reveals Norway as the most prosperous country in the world, while the Central African Republic finishes bottom of the rankings.

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The UK was singled out by the Legatum Institute as a good place to do business in its 2014 Prosperity Index

David Cameron is being forced to change his planned reform of immigration rules to win Angela Merkel's support

The UK is ranked 13, three places higher than last year's index, and one spot ahead of Germany.

The two countries are locked in a battle over Mr Cameron's plan to renegotiate Britain's membership of the EU.

The Prime Minister has vowed to put freedom of movement at the heart of his vow to claw back powers from Brussels.

However, in an escalation of tensions between London and Berlin, Mrs Merkel has reportedly told Mr Cameron that Germany would rather see Britain leave the EU than allow him to tear up its rules on free movement of labour. 

The German Chancellor warned the Prime Minister that he is reaching a ‘point of no return’ by pushing for reform of the bloc’s sacred free movement system.

The threat has forced Mr Cameron to tone down his ambitions for any deal to curb EU immigration.

Legatum Institute's 2014 Prosperity Index reveals Norway as the most prosperous country in the world, while the Central African Republic finishes bottom of the rankings

Legatum Institute's 2014 Prosperity Index measures a set of eight categories that reveal how nations perform both economically and in vital areas of education, health, personal freedom, safety and security and entrepreneurship.

France came 21st in the list, Spain 26th and Italy 37th, while Russia is the worst performing country in Europe, falling seven places to 68th.

Chancellor George Osborne said the study provided further international support for the Government's long-term economic plan.

He went on: 'Thanks to the difficult decisions we have taken to deliver economic security and control the public finances, we have moved three places up the global rankings.

'It's fantastic to see Britain leading the way for entrepreneurship, personal freedom, health and education.'

James Barty, a special adviser to the Institute, added: 'Politicians are often blinkered by what drives national success.

'Although a solid economy is a pre-requisite - and the Government should be proud of its achievements in putting the public finances on a sound footing - other factors are vital when it comes to prosperity.'

The index covers 142 countries in the world, accounting for 96 per cent of the world's population and 99 per cent of global GDP. 

The report found that the UK is one of the top countries in the world for entrepreneurship, ranked 8th worldwide.

It singled out the fact that it is ‘relatively easy to start a business, costing only around £66’.

There are also strong internet connections while the coalition government ‘have taken a number of steps to increase support for entrepreneurs and this seems to have helped public perceptions with the number of people who believe that hard work pays, growing by 6 per cent, to 84 per cent, since 2009’.

It also found 74 per cent of Brits donate to charity, the 4th highest in the index, compared to 42 per cent in Germany and 26 per cent in France.

France has dropped out of the top 20 for the first time, falling to 21st place.  Earlier this month Mr Cameron took a swipe at France's struggling economy, ridiculing its 'nonsense' rule stopping people working more than 35 hours a week.

The Prime Minister said the French 'obsession' with the policy was to blame for the country's unemployment crisis – with more than 10 per cent of the population out of work, while the UK's jobless rate has plummeted to just 6.2 per cent.

Mr Cameron's jibe, which will spark fury in Paris, comes after the International Monetary Fund predicted Britain would overtake France to become the second-biggest economy in Europe next year.

Mr Cameron said France was in danger of falling for the 'nonsense' idea that there were a fixed number of jobs in the economy and that a 35-hour week would help share the work around.

He acknowledged it was 'very dangerous' to point a finger at a fellow European country, but launched an attack on the policy which has remained in place under socialist president Francois Hollande - despite calls for reform from within his own administration.