The Tories are one of the world's most enduring political parties. But this long life is built on its cultural attractiveness to parts of the English middle class, especially in the home counties, rather than on its political judgments, which have, over the centuries, been almost continuously wrong, especially in foreign policy.

It was wrong to resist revolutions in France and the US; wrong to go slow over abolishing the slave trade; wrong to champion the Corn Laws; wrong to embrace appeasement in the 1930s; wrong to contest the decolonisation of India. The British right's instincts – jingoistic, imperialistic, anti-progressive and isolationist – have consistently led this country into calamities. Today, once again, the Conservative right, indulging its atavistic instincts and egged on by a no less atavistic right-of-centre press, is landing the country in the soup.

There might have been a case for David Cameron to veto the use of the EU treaties for the eurozone bailout if Britain's national interests had really been threatenedk. But they were not. Much of British finance in whose name Cameron exercised his veto – routine banking, insurance and accounting – was wholly unaffected by any treaty change. The financial services industry in Britain constitutes 7.5% of GDP and employs a million people; the City represents perhaps a third of that and, in turn, that part threatened – if it was threatened at all – some fraction of that. This is a tiny economic interest. If the coalition is serious about rebalancing the British economy, it is preposterous to place a fragment of the City at the forefront of our national priorities.

Moreover, any tax, such as the financial transaction tax about which Cameron was so exercised (and which is, in any case, a good idea if done right as recommended by the IMF), has to be agreed by all. Which means that the threat was nil. Even regulatory proposals, although proceeding by qualified majority voting, have in financial services proceeded, in reality, by unanimity.

There was no threat that could not have been resisted if Britain really was committed to defending the casino dimension of the City. Our entire relationship with the member states of the EU, along with our capacity to shape policies that may influence a far higher share of our GDP, has been put at risk for nothing. At worst, a dozen foreign investment banks and a couple of dozen hedge funds, along with their bonuses, might have been affected. But now the capacity to defend them, even if we wanted to, has been thrown away. As an act of self-defeating, crass stupidity, this has rarely been equalled in British foreign policy.

Worse, we have made it significantly harder for the 17 members of the eurozone rapidly to put in place the cluster of policies needed to save the euro. Chancellor Merkel said the compromise was workable – to widespread German scepticism; the European Central Bank warmly welcomed the progress, but announced no new measures. If the euro breaks up because its members have to move clumsily and slowly outside the formal EU treaties and institutions because of Cameron's veto, the resulting series of bank collapses and consequent depression will hurt Britain badly. What's more, fellow Europeans will not forgive us for a generation. This is a catastrophic moment in British and European affairs.

David Cameron is the best and worst of upper-middle class, home counties England – decent enough but saturated with prejudices he has never cared to challenge. He understands his own party and its instincts, but beyond that his touch is uncertain and his capacity to empathise with others close to non-existent. Doubtless, he thought his demand for Britain to be exempted from any measure on financial services to be reasonable, but he completely underestimated how it would be understood by a eurozone member in an existential fight to defend their currency. His circle is the hedge fund managers who payroll his party, rightwing media executives and the demi-monde of Tory dining clubs, Notting Hill salons and country house weekends, all of whom he knew could be relied to cheer him for his alleged bulldog spirit and Thatcher-like courage in saying No to European "plots".

For him, politics is not about statecraft in the pursuit of a national vision that embraces all the British. It is an enjoyable game to be played for a few years, in which the task is to get his set in and look after them and hand the baton on to the next chap who will do the same.

The over-riding preoccupation was to manage his tribe, now in thrall to the worst of ancient Tory instincts that have been so consistently wrong. In no circumstance could he risk having to take a treaty change through the Commons relying on Lib Dem, Labour and a minority of Tory votes, accompanied by an ever-more hysterical insistence that there should be a referendum on Britain's relationship with Europe. The paradox of referendums is that they are anti-democratic devices, only ever deployed by politicians and commentators if they are certain about the result; this is why they are the favourite device of despots and dictators. The Tory right, certain of the result, given overwhelming press support, smells blood; if they can engineer a referendum, Britain can leave the detested EU.

The detestation of the EU is largely irrational – even if very real. Britain enhances its power and de facto sovereignty through membership; it loses it by becoming the creature of the financial markets and the City of London so beloved by Conservatives. If the EU suggests policies we don't like, there are opt-outs and compromises galore, hardly the anti-democratic monster of sceptic imagination.

None of the eurosceptics baying for a referendum objects to Mayfair, Kensington and Knightsbridge becoming ghost towns owned by foreigners, nor to swaths of our great companies and brands falling into foreign ownership. This loss of control and autonomy is fine. But to make common cause with our European neighbours to enlarge our capacity to act in the world causes collective heart failure.

The objection is less rational but cultural. Europe is the victim of the same journalistic standards exposed by the Leveson inquiry – and if it were a person would be one of the most compelling witnesses. Stories about the EU have been distorted and fabricated for 30 years; it is depicted as a foreign leviathan aiming to rob free-born Englishmen of their liberties. Tales are shoehorned into conforming with that predetermined template.

Corrupt journalism is not consequence-free: it impacts on our culture and, ultimately, on our political choices. Of course the EU makes mistakes, but the attempt to recognise European interdependencies, create common minimum economic and social standards and cement friendships hardly deserves the treatment it receives in Britain and our press.

What now? This is a watershed moment. For some Lib Dems, it is close to breaking point. Business secretary Vince Cable spoke passionately in cabinet last Monday against making the small casino part of the City a vital national interest; why, he asked his colleagues, protect financial engineers and tax-evaders? He was ignored and furious when he learned what had happened. He will speak out aggressively against Cameron's veto; his decision is whether to resign to do so or say so in office, courting his sacking.

The coalition is engineering stagnation at home and isolation abroad and all to serve a tiny and imagined economic interest. If Cable resigns or is sacked, it cannot hold, even if Clegg wants to limit the fall-out inside rather than outside government. A new political dynamic has been launched that politicians will find hard to control.

Do we really want to live in a country designed solely for Cameron's tribe? Do even bankers believe the sole purpose of national policy should be to protect their trading desks' capacity to do anything they want? On what terms do we want to live with our neighbours?

On these issues, the Tories are wrong and in a democracy at a time like this must be confronted. A general election before 2015 is now certain. David Cameron and his party should not be so cocksure they will win it.