Seeing a party in power melt down before your eyes would be a riveting spectacle, if it weren’t so shocking in its frivolity. The great Tory schism that has been boiling away since Margaret Thatcher’s day is finally bubbling over. Except it is beginning to look less like a split than a party united in taking leave of its senses. You could think of Labour in 1983 – but it was out of power. Watching the Conservatives tombstoning off a cliff and ploughing out to sea is more bewildering: they are the government.

What a time to implode over the EU, as Europe faces its greatest external crisis. Putin’s tanks invading Ukraine was, Cameron said in Brussels, a “completely unacceptable situation … consequences must follow”, with united action. At the same time, the Middle East is erupting, with the threat to Britain rated “severe”. But the once sober party, serious about security, is turning into Trotskyites of the right. Willing their party to lose to purify itself for a future victory is the ultimate political brain fever. The wise ones may be the chicken-run Tory MPs quitting before they lose their seats.

Douglas Carswell’s defection shouldn’t light the blue touch-paper. After all, he was the wildest man on the fringe – and closest to losing his seat to Ukip, which he may now save. But what an odd time to go, just as an elemental shift turns the Conservatives into an out-and-out EU exit party, plunging headlong for the departure gate.

The influential grassroots organisation ConservativeHome has launched a pre-election manifesto calling for an end to EU free movement of labour, with reclaiming control of national borders as a red line in negotiations. A Times editorial yesterday supported it, as Murdoch would. This is a guided missile straight into Cameron’s renegotiation strategy, already rapidly disintegrating. ConservativeHome is deliberately demanding the impossible. Charles Grant of the Centre for European Reform says there is no possibility of the other countries agreeing, and no new treaty would pass in referendums.

Immigration is what fires popular anti-EU sentiment. But anyone who advocates limiting it is advocating exit. The louder his party calls for impossible terms, the more fruitless Cameron’s renegotiation plan looks. Tightening the screw on benefit tourism, which Germany is doing, won’t go far enough: nothing the EU will agree can ever be enough for the sceptic mob.

Cameron swept the last moderating influences out of his cabinet – goodbye to Ken Clarke, David Willetts, Damian Green and Dominic Grieve. The extreme nature of the 2010 intake of Tory MPs shows that selection by the dwindling, elderly, Europhobic local Tory parties is now impossible without Europhobic credentials. That same Tory party will select the next leader, so any contender must head for a British exit. Boris Johnson has effectively made “out” his pitch already. Theresa May follows suit by supporting an EU immigration cap – an impossiblist demand signifying “out”.

Now here comes the other challenger, George Osborne, rowing hard the same way. The chancellor, it seems, is ready to put jockeying for personal power ahead of the national interest. Janan Ganesh of the FT, whose ear is closest to Osborne’s inner circle, reports that Osborne’s thoughts on Europe have undergone an “unmistakable hardening”. In the latest edition of his biography of the chancellor, Ganesh says that, for Osborne, EU exit is “no longer unthinkable” and “a sequence of events leading to that end could be imagined”. Leaving is no longer the banging on of “crazies and bores” but is now a mainstream ambition in his party.

The virus eating at the vitals of a once serious party is gaining ground. The election will be fought between Conservatives for “out”, with Labour for “in” standing on the solid centre ground. Even if business never votes Labour, the CBI and chambers of commerce will have to declare against exit, which the National Institute of Economic and Social Research says will knock 2.25% off GDP and the LSE says could be far worse. What does it say about the character of the chancellor if he puts wooing his crazed party for the leadership above the UK’s economic interest?

There is no plan on the far side, only dreamy rainbows: Daniel Hannan MEP breezily says exit would “propel Britain to global prosperity”. But our only destiny would be as a fragile, lonely nation: Scotland would certainly depart. We would be an offshore tax haven for the scoundrels of the world, outside the human rights conventions, adrift with no negotiating power for trade.

The strangest fallout is that the beleaguered David Cameron now appears as a moderate, almost alone in his pretence that he can win terms good enough to keep the country in Europe in a referendum he recklessly promised. Yet he has led his government in the most rightwing direction since the war. Under cover of austerity he has privatised and shrunk the state beyond anything Thatcher thought politically possible. On election day Europe will not be the issue pulsating through the veins of most voters, but things closer to home.

I just visited his Witney constituency – a safer seat is hard to find. Yet when you lift the yellow Cotswold paving stones, even there you find the depredations of his government biting deeply. The local housing association can’t find smaller properties for its 252 residents hit by the bedroom tax: 47% are in arrears. The local domestic violence service is losing its helpline and 40% of its funds, though Cameron publicly promised to “get a grip” on the issue. I spoke to a Ukip council candidate who has been hit by the bedroom tax: he has a spare room now his invalid wife has died.

The Witney food bank is crammed in a tiny garage on the edge of town, because nowhere in this rich town, not even a church, will house it, yet demand is high. Julie, who runs it, cried when a man came in with four bags of food in repayment for feeding him, now the Department for Work and Pensions had finally sent his money. Cameron visited once, but brought nothing, says Duncan Enright, councillor and Labour candidate here, a man who devotes himself selflessly to local campaigns in this deep blue zone. He found a man and his son sleeping locally in a tent for weeks recently. Wages are low, he says, and housing impossible.

Even here, in this rustic idyll, there are people struggling and Tory voters can see it too, with day-centre charges soaring and service cuts growing. But the Tory party is swimming out to sea on a tide of Euromania, in the grip of a nihilist ideology. Only disconnect from Europe and all will be well – that doesn’t sound likely to connect with most voters’ lives.