To this point, the European crisis has been a case of France and Germany dictating decisions to everyone else in Euro union. But there’s another potential player in all of this mess. The Merkozy preferred plan for tighter fiscal consolidation, with sanctions for member nations that fail to reach budget targets, requires a change to the Treaty of Lisbon, which covers not just the 17 countries in the Eurozone, but all 27 member countries in the EU.  If that route is pursued, any country that vetoes the treaty change would effectively block it. And that brings Britain into the picture. David Cameron wants his pound of flesh for accepting the treaty changes, and it has to do with the financial sector:

David Cameron has threatened to wield Britain’s veto to block a revision of the Lisbon treaty if fellow European leaders refuse to protect the position of the City of London at the EU summit in Brussels .

In a marked hardening of his rhetoric, as Eurosceptic Tories called for a recasting of Britain’s relationship with the EU, the prime minister said he would not sign any treaty that failed to provide safeguards for Britain’s financial services.

The prime minister spoke out as Kenneth Clarke, the veteran pro-European justice secretary, told Eurosceptic Tories that they should abandon any hope of repatriating powers to Britain at this week’s EU summit. “No, we’re not going to renegotiate any transfers of powers, in my opinion,” Clarke told the FT [...]

The prime minister echoed Clarke’s view, though he used tougher language as he sought to reassure Tory Eurosceptics who were alarmed after Downing Street indicated on Monday that Cameron would not use the summit to demand the repatriation of social and employment laws. The prime minister said he would focus on protecting the position of the city and would be prepared to use Britain’s veto.

“I will not sign a treaty that does not have those safeguards in it, around things like the importance of the single market and financial services,” he told the BBC.

This is a naked play to protect British bankers, probably from the financial speculation tax, which the City of London opposes.

Even if those changes were secured, it’s not clear Britain would agree to the treaty alteration. A substantial segment of the Tory coalition in Parliament wants to break from the EU entirely. It’s likely they would push for a referendum, to put the treaty changes in the hands of a skeptical public.

Merkozy can get around this by just negotiating a side treaty with the Eurozone members, bypassing the likes of Britain and the other non-euro EU states. But that’s not their first preference. And Cameron needs to watch his threats, too, because if Merkozy pulls off the maneuver and goes around him, he will have problems at home for failing to use his leverage.

These political games are mildly diverting, but they don’t get to the core of the issue: that tighter fiscal consolidation, absent real steps to boost growth in the peripheral countries is, as Martin Wolf notes in the Financial Times, doomed to fail.

If the most powerful country in the eurozone refuses to recognise the nature of the crisis, the eurozone has no chance of either remedying it or preventing a recurrence. Yes, the ECB might paper over the cracks. In the short run, such intervention is even indispensable, since time is needed for external adjustments. Ultimately, however, external adjustment is crucial. That is far more important than fiscal austerity.

In the absence of external adjustment, the fiscal cuts imposed on fragile members will just cause prolonged and deep recessions. Once the role of external adjustment is recognised, the core issue becomes not fiscal austerity but needed shifts in competitiveness. If one rules out exits, this requires a buoyant eurozone economy, higher inflation and vigorous credit expansion in surplus countries. All of this now seems inconceivable. That is why markets are right to be so cautious.