Do what you like. Just count us out.

That, in essence, is the message that Britain is sending its European partners as the 17 countries that share the euro move towards closer economic integration.

In a departure from half a century of British diplomacy, PM Cameron has adopted a strategy of benign disengagement from the core project of the EU to appease the numerous eurosceptics in his Conservative party.

Rather than seeking like his predecessors to shape and restrain European integration, he is watching from the sidelines as an inner circle of eurozone states launch separate annual summits and move forward with coordinating economic policy.

Cameron has said Britain has a vital interest in the success of the eurozone, its biggest trade partner, and he chose pragmatically to participate in an EU/IMF-led bailout of Ireland in December because of strong British economic ties there.

“There is a bit of apprehension about being left too much on the sidelines,” said Iain Begg, professor of European affairs at the London School of Economics, who said Cameron was trying to be as constructive as Conservative Eurosceptics would permit.

But he is now effectively pulling up the drawbridge with the continent by enacting a “United Kingdom Parliamentary Sovereignty Bill” that would make any further transfer of power from London to Brussels subject to a national referendum.

Britain opted out of the single currency when the Maastricht Treaty on monetary union was negotiated in 1991, but Labour governments between 1997 and 2009 were committed to joining it, in theory at least, if the economic conditions were right even though former finance minister Gordon Brown’s opposition rendered such a move impossible.

However, Cameron has pledged that Britain will never join the euro as long as the Conservatives are in power.

His other two main priorities – more traditionally British – are to curb the common EU budget while preserving Britain’s rebate, and to protect the City of London financial centre from intrusive European regulation.

His approach is driven mainly by the need to preserve a fragile ceasefire both among Conservatives and with their pro-European Liberal Democrat governing coalition partners.

The coalition pact to neither enter into closer European integration nor, as Conservative Eurosceptics had sought, withdraw from existing EU policies in areas such as employment was workable only as long as the EU stood still.

But the debt crisis is forcing the eurozone to move ahead rapidly with stricter fiscal discipline, prior scrutiny of national budgets, a permanent rescue fund and broader economic policy coordination – all anathema to British sovereignists.

Scramble for influence
Cameron’s “little Britain” policy is already having consequences for both Britain and Europe.

For one thing, it has left long-time British allies in northern and eastern Europe to fend for themselves.

Sweden and Denmark, which like Britain chose not to join the single currency, are now scrambling to strengthen links with the eurozone for fear of being left out of economic integration.

Swedish Prime Minister Frederik Reinfeldt underlined his discomfort at the emerging two-speed Europe in an interview with reporters. “We should not have that kind of division inside the European Union for the future,” he said, bristling at separate eurozone summits.

Danish Prime Minister Lars Lokke Rasmussen has said Denmark may soon need to re-evaluate its decision to stay out of the euro as members of the currency intensify economic cooperation.

“Denmark cannot tolerate that economic policy is made in a room where Denmark cannot be present because of its euro opt-out,” said Rasmussen.

In one emblematic incident, British finance minister George Osborne was made to wait for hours in a corridor in Brussels last May while eurozone finance ministers nailed down an agreement on a financial rescue mechanism.

“He was not a very happy man,” a senior EU official said.

Poland and other central European states saw Britain as their pro-enlargement, pro-market best friend when they joined the EU in 2004 but they are now racing to build closer ties with Germany and France to avoid being stuck in Europe’s slow lane.

The Poles are furious because Britain’s drive to shrink the EU budget would hit regional development funds earmarked for Warsaw and the other newcomers.

Diplomats and analysts say Britain’s effective withdrawal from the economic and fiscal policy negotiations has even pushed France and Germany into each other’s arms.

It has deprived the Germans of a free-market counterweight to French state-driven dirigisme, and robbed the French of a political balancing force against German dominance.

“One of the most potentially damaging things is the impact on the balance of economic philosophy within the eurogroup,” said Charles Grant, director of the Centre for European Reform.

“Without Britain, Sweden, Denmark or Poland, the whole thing will become more corporatist.”

That could weaken a drive led by elder statesman Mario Monti to extend the EU’s single market in areas such as energy and services.

Cameron upset German Chancellor Angela Merkel even before he took office by taking the Conservatives out of the mainstream centre-right political family in the European Parliament to form a Eurosceptical fringe group with Czech and Polish rightists.

He has sought to build bilateral ties with France, signing defence agreements and working on foreign policy initiatives. In the recent crisis over popular uprisings in North Africa, London has worked closely with Paris and Berlin.

“Cameron is probably learning that he has got to work through Europe on a lot of issues, for example to reform the EU neighbourhood policy towards north Africa,” Grant said.

“But the risk is that you get a Britain that is half in and half out of the EU. That probably is sustainable for a while, but it would be a bad outcome because Britain would lose influence on things we should want to influence.”