It was the second ambush on the Prime Minister this week, after Labour aligned with Tory rebels and called on the Government to demand a cut in the EU budget.
The move led to the Government being defeated in the Commons on Wednesday night.
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Deputy Prime Minister Nick Clegg used a major speech at Chatham House in London to demolish the Tory idea of repatriating powers from the European Union
And he said even starting down the track of renegotiation would lead to Britain ending up ‘out of the European Union’.
His intervention means it will be impossible for Mr Cameron to propose any repatriation of powers before the general election in 2015, despite repeated pledges to seize the ‘opportunity’ presented by changes to the eurozone to reclaim sovereignty.
Mr Clegg accused David Cameron of 'stamping his feet' and demanding the EU club give Britain special treatment
A day after 53 Tory rebels delivered a humiliating defeat to Mr Cameron by voting for a cut in the EU budget – rather than the real terms freeze the Prime Minister has advocated – Eurosceptics said they would vote against any budget that sees an increase in EU spending.
Rebel leader Mark Reckless said: ‘If the Government comes with anything except a cut in the EU budget, then they are not going to be able to get that through Parliament.’
To make matters worse for Mr Cameron, Mrs Merkel yesterday attacked his threat to veto any inflation-busting rise in the budget, saying a deal needs to be done quickly so the EU can concentrate on the crisis in the eurozone.
‘I don’t want to throw more vetoes into the room, it doesn’t help bring about a solution,’ she said.
Despite the Commons defeat, Downing Street made clear Mr Cameron will continue to argue for a freeze rather than a cut in the Brussels budget for the period 2014 to 2020, which will be thrashed out at a summit later this month.
Mr Clegg backed up the PM on this, saying there was ‘absolutely no prospect’ of securing a cut in the EU budget.
But he then accused Mr Cameron of ‘stamping his feet’ over the repatriation of powers to appease his Eurosceptic MPs with a promise he will never be able to deliver.
Mr Clegg said it was a ‘seductive offer’ to ‘opt out of the bad bits and stay opted in to the good bits’ of EU legislation.
Earlier this month Mr Cameron said the eurozone crisis presented an ‘opportunity for Britain to get a better settlement with Europe’ and he would ‘then seek fresh consent for that settlement’, probably in the form of as referendum.
But the Lib Dem leader told the Chatham House think tank: ‘A grand, unilateral repatriation of powers might sound appealing but, in reality, it is a false promise, wrapped in a Union Jack. This idea that we should, or could, extract ourselves from the bulk of EU obligations is nonsensical.’
Mr Cameron has said he thinks Britain is better off in the EU, but is under pressure to offer voters the option of leaving.
David Cameron made his promise to reach a new settlement with Brussels during the Tory party conference, but made no mention of it during his keynote speechMr Clegg said renegotiation could usher the UK to the exit door. ‘Let’s be honest, many of the people who advocate repatriation are the same people who want us out of Europe – full stop.’
Home Secretary Theresa May has published a list of 130 EU law and order measures she would like to bring back to Britain. But Mr Clegg indicated that he would be ‘led’ by the security services in insisting the UK stays in the European Arrest Warrant scheme, which many Tories want to ditch.
Mr Cameron last night insisted he would stand firm on the budget: ‘We should be absolutely clear this Government is taking the toughest approach to the EU budget of any government in this country’s history.
'If we don’t get what I consider to be a good deal for Britain I have no hesitation in vetoing the multi-financial package.’