Unusually for Westminster, whose dynamics usually operate as a seesaw with one side up when the other is down, both main party leaders suffered significant setbacks last week. Cameron’s proposals to end freedom of movement in the European Union were roundly rejected at a summit of usually friendly northern European leaders, underlining the extent of his isolation and the futility of his European agenda. But his woes have been eclipsed by Ed Miliband’s headaches at home, with news in our paper today that heavyweight figures – not the lone, isolated backbenchers characterised by the leadership until now – within his party are behind the scenes trying to oust him barely seven months from an election.

Many of the critics in the press and his own party have united around a common narrative: he was gifted a Conservative party that could not win an outright majority even against the unpopular Gordon Brown and which has made unpopular cuts and careless blunders, such as their disastrous NHS reforms. But he squandered the opportunity to make capital from this: rather than building an electoral coalition of the moderate majority, he has remained in his comfort zone, pursuing a 35% strategy reliant on the base of party members and union apparatchiks that won him his narrow leadership victory. Moreover, even this core vote is now in question: the Labour base risks crumbling away as a generation of lifetime Labour supporters switch to the SNP in Scotland and Ukip in England.

This critique is flawed: it fails to acknowledge just how much the public’s faith in politics has been rocked by the recent crises that hit the financial and political establishments. Not just in the UK but across the whole of western Europe the vote shares of mainstream parties are falling and populist parties of the left and right are on the rise. Britain has always been relatively insulated from insurgent parties by its first-past-the-post voting system. But the combined vote share of Labour and the Conservatives now looks to be dipping below the level needed to sustain a two-party majoritarian system, with Ukip looking set to win their second parliamentary seat in the Rochester by-election on 20 November. Stitching together an electoral coalition based on policy by numbers is simply not enough to reengage a disaffected and a cynical public.

Miliband realised early on more of the same was not a credible strategy in the wake of the financial crisis. Perhaps more than any other mainstream leader in the developed west, he has advocated a radical economic agenda, centring on the redistribution of power, not just money, and the importance of dignity, not just handouts. He has pledged a number of commitments aimed at easing economic pressures on struggling families: freezing energy bills, breaking up the banks, building a million new homes, banning zero-hours contracts and increasing the minimum wage. Many of these policies attract huge popular support. But this is not translating into personal support for him or his party. Why?

Miliband’s biggest strategic error has been his optimism about the extent to which public anger about the financial crisis would automatically translate into support for a new centre-left agenda. He believed the nation’s political compass shifted left after 2008. But the real impact of the financial crisis – twinned with an expenses scandal that highlighted deep corruption in the political class – was to swing the needle round to apathy and disaffection.

This misplaced confidence has led him to a formulaic problem-and-solution politics that has framed his agenda far too negatively. It centres on government challenging vested interests in order to put more pounds in people’s pockets. But this style of politics sounds much better coming from populists: Nigel Farage has shown immigrants and EU bureaucrats make for more unpopular scapegoats. And it is much easier for Ukip, untouched by the public’s loss of faith in mainstream politicians, credibly to make the case it will do something about them. Simply setting out how Labour will tackle a different vested set of interests cannot effectively counter the Ukip threat. Instead, Alex Salmond demonstrates what is possible when politics is framed not just in terms of tackling the country’s problems but in the romanticism of building a nation.

Miliband has tried to address public cynicism about mainstream politics directly, calling for a new politics in a speech earlier this year. And he can make some claim to have practised this: his most authentic moments have been when he took on the Murdoch press over phone-hacking and condemned the Daily Mail for lying about his late father’s views. The problem is these flashes of brilliance have interspersed long periods during which he has done exactly what he criticised in his speech: playing the old politics of yah-boo PMQs and negative briefings and running a bunker-mentality office. He also early on allowed himself to be passively defined by his own old-politics trajectory of special adviser to rising parliamentary star to opposition leader who beat his older brother on the national stage.

These inconsistencies come from not just a divided team, many of whom are risk-averse, but from Miliband’s internal conflicts. Too often, playing it safe wins out over being bold, for example in his recent failure to stand alongside care workers in his own constituency striking in a campaign to be paid the living wage that Miliband has overwhelmingly endorsed. The best of his speeches show Miliband has it in him to be a gifted communicator, but his performance is far too variable and does not translate on television.

Miliband has led the way in confronting the implications of the global financial crisis and he deserves credit for that. But his most serious error has been his failure to take the public loss of faith in politics as seriously. Seven months before the next election, he is at a crossroads: should he succumb to pressure from critics to cobble together a lowest-common-denominator electoral coalition based on tough messages on benefits, immigrants and the EU? Or should he force his inner Treasury adviser to take a back seat and take greater risks to demonstrate his claims that he rejects politics as usual?

The beginnings of full-scale revolt in senior echelons of the Labour party will – must – force his hand. Should he choose the road of caution, the best he can hope for is limping over the threshold to be the largest party, with a weak governing mandate, reliant on at least one, if not two, of the smaller parties for support: prime minister by default. If he survives this leadership challenge, it is surely time for Miliband to take the biggest risk of his political career and back his inner radical.