David Cameron plunged Britain's position in Europe into the greatest uncertainty in a generation as he used his veto to block a new EU-wide treaty and left at least 23 other countries to forge a pact to salvage the single currency.
With the apparent blessing of the pro-European deputy prime minister, Nick Clegg – and the subsequent delight of Tory backbenchers – Cameron deployed the ultimate weapon in European summitry at about 2.30am yesterday.
EU leaders promptly agreed to bypass Britain and establish a new accord on the euro among themselves by March. The EU appeared poised to line up 26-1 against Cameron in support of the Franco-German blueprint, leaving Britain utterly isolated.
Cameron's bombshell came at what was billed as the most important EU summit in years, with the fate of the single currency hanging in the balance. The veto was unexpected and was being seen as a watershed in Britain's fractious relationship with the rest of Europe. Cameron insisted on securing concessions on, and exemptions from, EU financial markets regulation as the price of his assent to the German-led euro salvation blueprint.
The others balked, France most vocally, accusing Cameron of putting Britain's perceived interests ahead of resolving the EU's worst crisis.
While Cameron has failed to secure the concessions for Britain's strong financial services sector, Britain has also forfeited its place at the table where Europe's future and the new euro regime will be determined. For the first time since Britain joined the European Community in 1973, a treaty that goes to the heart of how the EU works will be struck without a British signature.
"I said that if I couldn't get adequate safeguards for Britain in a new European treaty then I wouldn't agree to it. What is on offer isn't in Britain's interests so I didn't agree to it," Cameron said. He could not allow a "treaty within a treaty" that would undermine the UK's position in Europe's single market.
Last night the prime minister went further, suggesting that Britain's membership of the EU was no longer a given. "Membership is in our interests. I've always said, if that's the case, I'll support our membership," he said, appearing to query whether being in the EU would remain in Britain's interests.
Cameron appeared initially to have lukewarm backing from Sweden, the Czech Republic and Hungary. But by all three had signalled they would take the Franco-German proposals for a new "fiscal compact" to their parliaments.
With at least 23 countries signing up for a deal conferring intrusive rights on European institutions to enforce budgetary policy in countries breaking the euro's debt and deficit rules, as well as quasi-automatic penalties for delinquents, the German chancellor, Angela Merkel, the central driver of the new regime, appeared sanguine and unbothered by the British veto.
"The breakthrough to a stability union, a fiscal union has been achieved," she said. "Only one country, Great Britain, distanced itself." She added: "I really don't believe David Cameron was ever with us at the table. We're very pleased with the result. [The deal] was no weak compromise for the euro."
But Cameron was scornful of what the summit accomplished. "I don't actually think the world is waiting with bated breath about what was the exact nature of the institutional relationship. I don't believe they're sitting in the trading rooms wondering whether there's going to be a new reverse QMV [qualified majority voting] article on integrated budget setting of blah, blah, blah."
Boris Johnson, the London mayor, said Cameron had "played a blinder", a mood shared by the rest of the Tory right.
Downing Street said Cameron had contacted Clegg . "This was a coalition position. This was an agreed position," Cameron emphasised.
Clegg fell into line, describing Britain's demands as "modest and reasonable". But later, after talks with his party, Clegg said "any Eurosceptics who might be rubbing their hands in glee about the outcome of the summit should be careful what they wish for because clearly there's potentially an increased risk of a two-speed Europe in which Britain's position becomes more marginalised and, in the long run, that would be bad for growth and jobs in this country."
Lord Ashdown, an ally of Clegg, told the Guardian: "The deep and sustained anti-European prejudice of some in the Tory party backed by anti-European papers has now created anti-British prejudice in Europe, especially in Paris.
"There will be a huge price to pay and, as a consequence, the foreign policy priorities of this country for the past 40 years has gone down the plughole in a single night. That foreign policy has now been hijacked by the Eurosceptics in the Conservative party aided by a prime minister who was not prepared to stand up for the national interest. As a consequence we have lost control of the European agenda and the prime minister has lost control of the demands for a referendum.
"This has been Gallic payback time for the way in which Cameron went around Europe lecturing Sarkozy on what to do."
Figures such as Ashdown believe Clegg managed to reduce Cameron's negotiating demands by the end, but the French were no longer willing to listen.
But Sharon Bowles, the Lib Dem MEP who chairs the European parliament's influential monetary affairs committee, accused Cameron of betraying British interests to curry favour with Tory Eurosceptics.
"The way in which the UK is isolated now is very damaging. We played, we lost, and now we are worse off," she told the BBC. "The point of the summit in Brussels was to fix the eurozone. However, under pressure from Eurosceptics in his party, Cameron has decided effectively to relegate the UK to the sidelines of Europe … Without a place at the negotiating table, we may not get to influence those very policies that will impact on the City and our financial sector as a whole."
Arguing he had to protect the City of London, Cameron demanded that any transfer of power from national regulators to an EU regulator on financial services be subject to a veto; the UK be free to place higher capital requirements on banks; that the European Banking Authority remain in London; and the European Central Bank be rebuffed in its attempts to rule that euro-denominated transactions take place within the eurozone.He also argued that non-EU institutions operating in the City but not in the eurozone, such as American banks, should be exempt from EU regulation.
Market reaction was muted, ahead of ratings agency Standard & Poor's decision, which could be made next week, on whether to downgrade its credit rating for 15 eurozone countries.
Despite German failure to get all 27 to reopen the Lisbon treaty, the Cameron veto may even accelerate the creation of the new pact since it will be struck between participating governments, probably avoid delaying tactics in the European parliament, and may require less comprehensive ratification procedures.
The leaders also agreed that central banks in the eurozone as well as others would provide an extra €200bn in bilateral loans to the International Monetary Fund to boost the firepower of the bailout funds in the effort to contain sovereign debt contagion.