BRITAIN did not walk out of the EU last night. But let there be no doubt about it: we have started falling out.

David Cameron finally did what British prime ministers have threatened in Europe so many times, and used his veto last night in Brussels, my BBC radio told me at dawn this morning. This is an astonishingly dramatic moment, the BBC added: the British prime minister has refused to sign up to a new EU treaty involving all 27 members, because the rest, led by France and Germany, would not grant him the safeguards he sought giving Britain powers to block unwelcome regulation of the City of London.

As a result of Mr Cameron's veto, the BBC said, 23 other countries have now agreed to seek their own fiscal pact involving deep integration around the tax and spending powers of member governments. Standing on its rights as a member of the current EU treaties, Britain argues that such a pact within a union should not be allowed to use the institutions that legally belong to the 27, such as the European Commission, the European Council or the European Court of Justice. At one point, an EU diplomat informed me in an overnight email, Mr Cameron could be heard arguing with his fellow-leaders that when members of the new club of 23 hold their planned monthly summits, they should not be allowed to use the buildings and meeting rooms of the European Council.

The BBC's exceedingly well-informed political editor Nick Robinson predicts this will lead to a long series of legal battles and rows with other EU countries, and to calls from gleeful British Eurosceptics to press on and seek a wholesale renegotiation of British relations with Europe (which they will then want put to a referendum, threatening to split the Conservative-Liberal Democrat coalition).

That stuff about drama and rows is clearly right. But I fear I do not see where Mr Cameron used his veto.

In my version of the English language, when one member of a club uses his veto, he blocks something from happening. Mr Cameron did not stop France, Germany and the other 15 members of the euro zone from going ahead with what they are proposing. He asked for safeguards for financial services and—as had been well trailed in advance—France and Germany said no. That's not wielding a veto, that's called losing.

Now, the EU is proposing quite a range of damaging and stupid new rules for financial markets. Anthony Browne, a chief policy aide to the Mayor of London (and key Cameron rival) Boris Johnson has a point when he writes this morning on ConservativeHome that:

Faced with a choice between an EU treaty to save the euro and retaining control of regulation of the City, President Sarkozy decided to retain regulation of the City

But nobody can say they were surprised. The French government has been saying for weeks that it would not allow Britain to have a sweeping opt-out from financial services rules. Only last week, I quoted a pair of French government sources in my column, writing:

France sees a strong Europe as a lever of influence. Disliking the enlarged EU of 27 countries (in which its clout is diluted), France wants to use the euro crisis to deepen integration around a core of countries that use the euro, under the political control of a handful of big national leaders. To comfort French voters, Mr Sarkozy has started talking up euro-zone integration as a shield against globalisation and bullying by financial markets. Today's unprecedentedly Eurosceptic Conservative Party sees a strong Europe mostly as a threat to Britain's global leverage. Mr Cameron says he supports deeper integration within the euro zone, as long as Britain does not have to pay, loses no sovereignty and yet is not marginalised. That is not enough for Tory MPs. They want the prime minister to use changes in the EU's architecture to secure concessions, such as opt-outs from European employment law or EU rules that harm the City of London. French sources call it “totally unacceptable” to allow British banks to set up in deregulated competition just across the Channel. Britain wants rights of oversight over the euro zone, it is said in Paris: well, the euro zone needs oversight over the City of London. If Britain seeks to “profit” from the crisis, then rule changes can be agreed by countries that use the euro, excluding Britain

And a very big part of what happened last night was a reflection of Mr Cameron's weakness within his own party, following a rebellion over a Europe vote that saw 81 Tory MPs ignore a strict, three-line whip. What happened last night, in addition to a fight to protect the City of London, is that Mr Cameron failed to secure a deal that he felt able to sell to his deeply Eurosceptic party (with two cabinet ministers demanding a referendum on any new treaty in the last few days, and scores of MPs ready to rebel on any EU bill put through the House of Commons).

It is worth being clear about this. Mr Cameron says he refused to sign up because he was defending British national interests in the long-term. In the immediate term, he took the decision to reject a new EU treaty because he was not sure he could get it through the House of Commons.

Having failed, he walked away, empty-handed. Just three other countries walked with him—Hungary, Sweden and the Czech Republic—and one or all of them may yet end up joining the new pact. We are not very far away from a final division of the club with 26 countries on one side, and one on the other.

This moment was both predictable and predicted. Everything dates back to a first meeting between the newly-elected David Cameron and Angela Merkel in Berlin in May 2010. By chance, in my previous role as Charlemagne, I was in the chancellery that day as one of a small group of Brussels correspondents invited for briefings from the German government. Mrs Merkel badly wanted Britain to stay on the inside track of the EU, we learned, fearing that she would find herself alone in the room with France and the Club Med countries. She wanted Britain and others for balance, and was anxious not to push away allies such as Poland who in theory plan to join the euro one day and are desperate to avoid being in an outer core.

Thus Mrs Merkel wanted to push ahead with new treaties to save the euro at the level of all 27 countries. I stayed on to watch Mr Cameron's meeting and joint press conference, and heard the British prime minister explain that he wished the euro well, but could not commit Britain to any involvement in deeper integration. I wrote this:

Mr Sarkozy dreams of building a new power structure round the 16 euro-zone countries. But Mrs Merkel wants economic policy to be decided by all 27 EU members, precisely because she likes to balance “Club Med” members of the euro zone with more liberal countries, including Britain, Sweden, Denmark, the Czech Republic and Poland. Yet David Cameron, the British prime minister, is adamant that deeper economic co-ordination in Europe must affect only the 16. That may be savvy British politics, but it risks pushing Mrs Merkel into France's arms.

A year and a half later, at some time around 4am last night in Brussels, Mr Cameron pushed Mrs Merkel into the arms of the French. She went along with this, and this was predictable too. In November I wrote a column from Berlin (sorry, last quotation from myself), setting out the German view:

there is frustration in Berlin at what are seen as British double-standards. Mr Cameron tells euro-zone members to do more to save their currency. Yet Britain does not offer to help and demands to be consulted on big decisions, for example on bank recapitalisation. In Brussels Mr Cameron tells the EU to beware of breaking up the single market, and stoutly defends free-trade rules that apply to all. Yet back in London, ministers talk of special opt-outs giving British business low-cost, deregulated membership of the common market. In Berlin the belief is that rewriting single-market rules would lead to many countries demanding more protections—the opposite of what Britain wants. Belgium, for instance, might push for more workers' rights. Facing a tough re-election fight, Mr Sarkozy last week declared that Europe should not be a “dupe” when it came to global trade, and proposed EU import taxes to help pay for European welfare systems. Germany's priority is rules establishing unprecedented oversight of euro-zone economies. If Britain asks too high a price for its consent, Germany will reluctantly agree to a new treaty outside the EU system. This, it is expected, would involve more than 17 countries but fewer than 27. Britain would lose its veto

Berlin offered one more, very clear message: that British Eurosceptics were wrong to declare that Britain could become the leader of the 10 countries that do not use the euro, the ten "outs". There is no club of outs, I was told, and Mr Cameron had a bruising taste of this reality at an October summit when Mr Sarkozy angrily told some of the countries outside the euro that they had no interest in siding with Britain.

What happens now? Well, British Conservative Eurosceptics divide into two broad camps. A more moderate camp have convinced themselves that EU membership is blocking the sweeping supply side reforms that they believe would propel Britain to renewed growth. They think that if Mr Cameron can only shed the influence of hand-wringing Euro-Quislings in the Foreign Office and the Liberal Democrat party, he can play hardball and renegotiate a new, low-cost, low-regulation free-rider membership of the single market.

This moderate camp is guilty, mostly, of excessive optimism.

For a fine summary of this position, look at this week's Spectator magazine, and its main editorial, headlined: "Leadership, please."

Published on the summit eve, the leader says:

British Europhiles have long scorned the concept of a 'two-speed Europe', but that is, by default, what is likely to emerge from the mess. We will have a first tier bound by fiscal as well as monetary union, smaller than the current eurozone, and second tier which will be increasingly divorced from the Franco-German power axis. Ideally, the second tier should impose minimal regulations and resemble the free trade area we signed up to in 1975. David Cameron is losing an opportunity to assert himself as leader of a wider European alliance. It could be an appealing place: promoting the free movement of goods, people and capital, but with each country retaining sovereignty and the power to set its taxes, prepare its budgets and retain a veto over rules which will be harmful to its national interest.

The Prime Minister is in a position of great strength, if only he would realise it. He is in the position that John Major was in the early 1990s, having lost a disastrous gamble to enter the Exchange Rate Mechanism (another bad idea which this magazine was alone in opposing). Then, it was all too easy to portray Britain as isolated in Europe. Now, there are already ten EU nations outside the eurozone who will play no part in any fiscal union. It is a constituency begging for direction—if only David Cameron would seize his opportunity

This fantasy politics lasted all of 12 hours.

The other Eurosceptic camp are essentially pessimists. A big dose of their pessimism about the flawed initial structures of the single currency has been borne out by events: to have a grown-up debate, this needs admitting. But they are much too gloomy about the single market, which they believe is not worth the cost of Britain's EU membership. They are much too sanguine, I would add, about the costs of a break-up of the euro (one Tory MP yesterday called for the disorderly break-up of the euro, while John Redwood, a darling of the right and former cabinet minister, today urges an orderly break-up of the currency as soon as possible). This camp thinks that British influence in the EU of 27 is not worth a candle. One red-faced misanthrope, Edward Leigh, yesterday told Mr Cameron not to come back from Brussels waving a piece of paper like Neville Chamberlain. For such Tory MPs, it is always 1938.

They would like Britain, essentially, to be Switzerland with nuclear weapons. I think Britain is bigger, and better than that.

Nor do I think we would be granted the sort of Swiss deal that British Tories yearn for. Switzerland is allowed access to the single market for relatively low cost because it is small. Because Switzerland is small, its absence from the single market table does not fundamentally alter the nature of that market. A walk-out by Britain, the largest free-market minded power in Europe, would change the nature of the single market fundamentally.

I also think that Switzerland's deal with the EU is not as good as British Eurosceptics think. It is built around accepting large chunks of EU regulation without any say in order to protect Swiss bank secrecy.

Oh yes, the banks. The City of London is very important, and the EU has some bad ideas for regulating it. But I find it hard to cheer the idea that Mr Cameron took an extraordinarily big decision last night about our relations with Europe because he was so convinced he could not win arguments in Brussels about those regulations.

A final thought. If we do end up leaving the EU for the sake of the City of London (a big if) it would be ironic if some of those same banks and hedge funds then turned around and announced they were leaving Britain anyway because euro-zone rules made it impossible to work in London, and so they were off to a combination of Paris, Frankfurt, Zug and Singapore. So sorry old boy, nothing personal.

PS for analysis of the wider euro-zone deal reached last night, which does not look very impressive, my Charlemagne colleague was up all night in Brussels and has posted here.