Multiculturalism is dead, long live multiculturalism. It's not a slogan that slips easily off the tongue, but it's the only one that seemed to capture the bizarre dissonance of a media abuzz with David Cameron's speech in Munich on the failed policies of "state multiculturalism" and my Saturday morning shopping in Hackney's Ridley Road in east London. Dozens of nationalities jostle for the best vegetables, dresses, blankets and cookware. The air is full of the smell of Turkish bread and African salted fish, the stalls are heaped with yams and chilis. The street traders' banter is littered with the Cockney endearments of love and darling. No one is dewy-eyed about this kind of London – there is too much poverty for that – but for all its many shortcomings, there is something extraordinary about how Britain has accommodated this hyper-diversity, the legacy of its economic boom of the last decade. And a sense that the process of how people become British, what it is to be British, is being subtly negotiated in a myriad of interactions on the street, in schools and hospitals.

What was so infuriating about Cameron's speech at the weekend is that this organic street-level process of Britishness was held up to ridicule as "passive tolerance", derided as a product of "failed policies of the past". In a speech that excoriated "muddled thinking" it then offered plenty of its own; worst of all, it dangerously confused the distinct agendas of counter-terrorism and community cohesion. This was precisely what the all-party committee on communities and local government warned against in a report a year ago. Cameron then went on to offer a straw man version of multiculturalism as promoting segregation. Despite all the spin ahead of the speech – "bold", "brave" – there was nothing new in his speech. We heard plenty of its kind under the last government. All that was distinctive about this usual formula of "signing up to British values" was the speech's timing and the venue – which I'll come back to.

But the thought that dogged my Saturday shopping was the irrelevance of this kind of political rhetoric. It is political posturing at its most pointless. The language is macho and energetic with phrases like "muscular liberalism" – this is the politics of body building: largely cosmetic but with an implicit capability to bully. It has almost no impact on policy – apart from snubbing a few community leaders – and the hard graft of maintaining good community relations, raising educational standards or improving health in poor communities grinds on, reaching out to the organisations in ethnic communities who can help achieve these goals. As Professor Tariq Modood recently pointed out, despite the continuing hostile political rhetoric the irony is that multiculturalism has continued to expand in government policy. It's partly a matter of pragmatism – how do you reach Asian mothers to teach them English? – and partly due to explicit government promotion such as new faith schools and the "big society" agenda of encouraging community groups. Politicians' speeches have floated free of policy development.

What grates even more is the self-aggrandising alarmism, so that Cameron urged "Europe to wake up to what is happening in our countries" as if no one had noticed extremist Islamist terrorism until he pointed it out. More sinister, the choice of phrase is a chilling echo of phrases used by the neoconservative US journalist Christopher Caldwell, whose doom-mongering Islamophobic book described the Muslim enemy within, whose birth rates threaten to overwhelm the continent. This kind of alarmist argument is increasingly popular in Germany with recent bestsellers such as Can Germany Save Itself?

It's disturbing that Cameron wants to align himself with this hysterical and extremely unpleasant German debate. What kind of ambition and projection on the European stage prompted Cameron to deliver what is essentially a speech aimed at a UK audience? (The finer details of which Muslim organisation to work with can hardly be expected to interest a European security conference.) It could get very nasty if Cameron is jostling with Sarkozy and Merkel to establish his credentials to articulate European anxiety about Islam.

Equally disturbing was the coincidence of Cameron's speech and the demonstration of the English Defence League in Luton on the same day. Downing Street insisted Cameron's speech had long been in the diary and wasn't going to be thrown off course by a few protesters. But at the very least Cameron could have put some clear distance between himself and such far-right extremism. His words were seized upon by protesters in Luton as support for their fight with Islam. Cameron was being at best careless, at worst dangerous, as the two stories were juxtaposed in news bulletins all day.

The problem is that how politicians choose to frame these issues seeps into the culture, establishing new assumptions and prejudices. How Britain and Europe accommodate Muslim minorities has become neuralgic – a source of deep anxiety that politicians are using to build up their constituencies. Nations are a product of the imagination and the stories we choose to tell ourselves of our past and present: that is the much quoted insight of the historian Benedict Anderson. If a generation of political leaders keep telling us that the hyper-diversity of London, Rotterdam and Hamburg is a failure, then that is how it will be understood; it robs millions of some measure of dignity in their efforts to adapt and accommodate difference. It deprives European urban multiculturalism of hope, as Modood points out, and makes it instead something to fear.

Ultimately this kind of political narrative is selling us all short with both a flawed analysis and diagnosis. Behind Cameron's speech – and those of Blair and Brown – is a nostalgia for a strong national collective identity, and a sense of shared values. But after a generation of individualism and globalisation, all kinds of collective identities have been weakened or abandoned. Many of the institutions that expressed and inculcated a sense of nationhood are in decline, whether political parties, trade unions or Christian churches. The fabric of institutional life in which we expressed values has been discarded in favour of individual freedom. The "vision of society" that Cameron urges as necessary is in fact already in evidence – in a million versions of consumer capitalism 24/7, and it promotes acquisitiveness.

Pinning these long-term trends to questions of Muslim integration has been a cruel and deceitful sleight of hand of politicians on both sides of the spectrum. It has ensured two things: first the key questions of racism and inequality – which drive segregation – are ignored. Second, it dodges the political rationale for extremist violence as a critique of UK foreign policy. Attention is driven to relatively trivial cultural symbols such as hijabs and minarets; and the language becomes vague and emotive with rallying cries about "our way of life". That ensures a debate in which there is plenty of heat, but little light.

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