As the dust settles, a cold new Europe with Germany in charge will emerge

• 
• • Ian Traynor in Brussels
  • guardian.co.uk, Friday 9 December 2011 16.17 GMT
  • Article history

As a clear damp dawn rose over Brussels on Friday morning, the tired and tetchy leaders of Europe emerged, bleary-eyed from nine hours of night-time sparring over how to rescue the single currency and indeed the entire European project.

Brave faces were put on, bluffs called, counter-bluffs revealed, vetoes wielded. Histrionics from France's Nicolas Sarkozy, poker-faced calm from Germany's Angela Merkel, David Cameron gambling the UK's place in Europe by opting to battle for Britain rather than helping to save the euro. When the dust settles, Friday 9 December may be seen as a watershed, the beginning of the end for Britain in Europe. But more than that – the emergence for the first time of a cold new Europe in which Germany is the undisputed, pre-eminent power imposing a decade of austerity on the eurozone as the price for its propping up the currency.

The prospect is of a joyless union of penalties, punishments, disciplines and seething resentments, with the centrist elites who run the EU increasingly under siege from anti-EU populists on the right and left everywhere in Europe.

"For the first time in the history of the EU, the Germans are now in charge. But they are also more isolated than before," said Charles Grant, director of the Centre for European Reform thinktank. "The British are certainly more marginal than before. Their influence has never been lower in my lifetime."

Whether or not the summit has saved the euro remains, of course, to be seen. At a single stroke, however, it has transformed Britain's place in Europe. With the fate of the currency at stake in the EU's worst crisis, Cameron opted for a fight and lost, placing the interests of the City of London before the European priority. Battling for Britain and wielding my veto in the Great British national interest, Cameron averred. There are senior UK officials who believe the prime minister betrayed the British national interest by picking the wrong fight at the wrong time, losing, and forfeiting a seat at the table that will determine the future shape of the EU.

"Cameron has miscalculated and performed rather badly. He didn't do well," said a senior EU official. If the main summit narrative was UK v EU, the frictions, anxieties and animosities generated by Germany's new ascendancy, however, extend much more broadly, enveloping France, Spain, Italy, Greece and others. Cameron went to Brussels saddled with backbench taunts of being the new Neville Chamberlain. The nasty references to the 1938 appeasement of Hitler, however, are not only heard on the Tory backbenches and in the Europhobic tabloids in Britain.

Nicolas Sarkozy, too, is contending with attacks from the right and the left that he has capitulated to Berlin and is being compared with the Frenchman who was with Chamberlain in Munich in 1938 – Édouard Daladier. In Greece, Italy and Spain the talkshows and newspapers are bristling with anti-German grudges, regularly bringing up the second world war, the Nazis, the alleged "Fourth Reich".

And in Germany itself, where its leaders are ambivalent about their new power and feel willfully misunderstood, columnists are calculating how much it is costing the country to bail out the eurozone's feckless states and comparing the figures to the colossal reparations it was forced to pay after the first world war, triggering the backlash which paved the way for Hitler. "We are going to have to put up with a bit of Germanophobia," wrote Jakob Augstein in Der Spiegel this week. "Europe has returned to the stereotypes of the postwar years. The ugly German is back … it would be better for Germany to get things wrong together with its partners than to insist on being right alone."

As German exports crash through the €1trn barrier for the first time this year and arguments about surpluses and deficits are seen in Berlin as the rest of Europe wanting to penalise its industries for success, there is little sign of Merkel listening to her critics. The Germans, famously, do not read John Maynard Keynes. Presenting the case this week for a penalties-based euro regime as the response to the crisis, a senior German official said: "We have got to get away from the illusion that state spending creates growth."

"Despite your understandable aversion to inflation, you appreciate that the danger of collapse is now a much bigger threat," Radek Sikorski, the Polish foreign minister, countered last week in a speech in Berlin. It is not clear that the plea was appreciated. Because of the German preoccupation with saving and not spending and what is seen as monetarist fetishism, says Grant, "we face 10 years of austerity with grim German schoolmasters rapping everyone else over the knuckles".

"When all this austerity hits the real economy, it will be bleak with unemployment going up," adds a senior official in Brussels.

"The recession we have now entered is the first 'made in Europe' recession since 1993," says Jean Pisani-Ferry, head of the Bruegel thinktank in Brussels. "The euro crisis has already taken a significant toll on the European economy. If things continue to worsen the toll could be huge."

The shift in the way power is wielded in the EU has been building incrementally for 20 years, since German unification, the destruction of the deutsche mark, the birth of the single currency, and the liberation then integration of eastern Europe redrew the map and the politics of Europe.

But the sovereign debt emergency, the financial crisis, and the response of Europe's leaders have brought the transformation into clearer focus than ever before this year. Germany calling the shots, France playing second fiddle, Britain sidelined, the eurozone split between haves and have nots, the smaller EU states fed up of being dictated to by a Franco-German "directorium", the European commission at its lowest point in years despised and ignored by Paris and Berlin, and the traditional pro-EU governing elite on the continent (not Britain) being challenged as seldom before by a new breed of anti-EU populists. This dismal situation is compounded by a crisis of confidence in leadership and a crisis of credibility in the markets. "A fractured Europe, inward-looking and navel-gazing," says Grant. "Unable to be a world player, staggering from crisis summit to crisis summit."

Others are less gloomy.

"Eventually Germany too will need to spend and invest," says the senior EU official. "You will probably have a different French leader. Merkel could lose the next election. There can be a return to Keynesian economics. This may be a moment of the domination of German orthodoxy, but things can change." The pleas to Merkel are becoming louder and more public. "This is the scariest moment of my ministerial life," told the German foreign policy elite in Berlin . "The biggest threat to the security of Poland today? the collapse of the eurozone. I demand of Germany that, for your own sake and for ours, you help it survive and prosper. You know full well that nobody else can do it." Merkel is in an uncomfortable position, feared if she wields her power overbearingly and criticised if she fails to lead. he seems uneasy with Berlin's new pre-eminence. "It's absurd to say that Germany wants to dominate Europe in any way," she told the Bundestag last week. If she decides to heed the pleas, change course, and help the rest of Europe, Cameron is unlikely to be among the beneficiaries.

Although the main clash in the wee hours in Brussels on Friday was between Cameron and Sarkozy, it was Merkel's, not Sarkozy's, blueprint that the prime minister wrecked. Merkel was alone in demanding that the route out of the euro crisis was to re-open the Lisbon treaty and for all 27 member states to facilitate her stiff new euro regime. Indeed, her demand was opposed by the European commission, by Herman Van Rompuy chairing the summit, by France, and by many others who feared that re-opening Lisbon was jerking open a can of worms. Cameron's veto saves their blushes. But it does not save the euro and for that there is likely to be payback for the British.

At least 23 EU countries will now endeavour to hammer out a new separate stability pact with teeth over the next three months. But because of legal wrangles over who is empowered to police and compel fiscal rigour and punish delinquents, the resulting pact may be weaker than Merkel planned.

In the cold new Europe taking shape, the Germans are more powerful than everyone else, but not all-powerful.