Life could still get harder for Cameron

Messy and poisonous though it already is, Britain's 26-to-one row with the European Union could become nastier and more bewildering.

EU officials say that the Government has to make a critical choice in the next few days.

British Prime Minister David Cameron could reach out to his EU partners and risk howls of "u-turn" from anti-European backbenchers and the Eurosceptic press.

Alternatively, he could ratchet up his row with the other 26 by opposing the use of EU institutions to implement the "inter-governmental" plans for closer fiscal union agreed in Brussels last week. This could undermine already fragile market confidence in the credibility of a legally vague agreement and help to propel the euro over a cliff.

A collapse of the euro, blamed rightly or wrongly on British "dog-in-the-manger stubbornness", would make the present row "look like a passing cloud on a summer's day", one EU diplomatic source said yesterday. Despite mixed signals in Cameron's statements to the House of Commons, Brussels officials believe the British PM - under pressure from his Liberal Democrat Coalition allies and from the Foreign Office - is now ready to take some of the heat out his dispute.

The European Commission President, Jose Manuel Barroso, said yesterday that Brussels hoped to work "constructively" with Britain in the next few weeks to "dovetail the fiscal compact" with the existing EU treaties.

The same word - constructive - was used by Cameron on Tuesday to describe his approach to the uncharted legal and political territory into which Britain, and the rest of the EU, have now stumbled.

But he also hinted that he would still expect in return some form of "exemption" for the City of London from the existing machinery for EU financial regulation. An important signal could be given as early as tomorrow when the euro group of national finance ministry officials meets to start making technical and legal sense of what was agreed in principle by the 26 governments in Brussels.

Will Britain seek to send a delegate to this meeting, even as an observer? This would indicate a willingness to be co-operative, at least for a while.

Brussels sources believe that London will at least adopt a wait-and-see position. It may not send an official to the euro group meeting. Nor will it make any immediate legal objection to the talks taking place.

There are precedents for groups of EU countries going it alone, such as the single currency itself and the Schengen agreement on open borders. But these emerged with the full agreement of all EU members. Independent