Over dinner Wednesday night, the leaders of Germany and the United Kingdom failed to resolve a dispute over a proposed raise in European spending.

David Cameron insists that the European Union’s budget should be frozen for another five years as the leaders of Britain, France and Germany agreed to in 2010. “I’ll be in there fighting for Europe’s taxpayers, particularly British taxpayers,” he said earlier in the day.

We cut ministers pay, froze it for a Parliament, reduced the size of the civil service, slashed the number of quangos, cut billions out of central budgets. We are not doing that in Britain to see the European Union do nothing similar itself.

The Anglo-German rift is problematic for policymakers in Berlin who previously considered the United Kingdom a natural balancer against France and other Mediterranean nations in the European Union.

Mats Persson, the director of the Open Europe think tank, writes in The Telegraph that Merkel’s frustrations may have reached the point where she is prepared to wave goodbye to Britain altogether. “In the past,” he recognizes, “Berlin needed London to balance the Mediterranean bloc. Now, Germany’s checkbook does all the talking.”

Southern European countries like Greece, Italy and Spain, which are dependent on European financial aid or European Central Bank financing of their debt, have little choice but to comply with German demands for economic liberalization and fiscal consolidation. They do so reluctantly, however, and there is little indication that they will want to continue such reforms in the long term.

Moreover, since the German leader has lost an ally in the French, who ousted the conservative Nicolas Sarkozy in May of this year and replaced him with a socialist president who is more susceptible to Southern Europeans’ concerns, she will need British support to truly make Europe’s a single market — the very priority of Britain’s Conservative Party leader.

Britain may already have lost its chance to be Europe’s balancer, though, when Cameron vetoed closer economic and fiscal integration in Europe last year over concerns that London’s financial industry would be subjected to tighter regulations. France and Germany refused to exempt the City as it would set a precedent for Britain and other member states to opt out of efforts they dislike.

As Sweden was also critical of fiscal union, the countries in the single currency area pushed ahead, possibly setting the state for a “two tier Europe” with a eurozone core that is closely integrated and peripheral states resisting federalization but participating in the single market.

Persson believes that “many in Germany now accept that a flexible Europe, allowing for different modes of membership, is inevitable. Such diversity could be a very good thing,” he argues. “It is also exactly what Britain wants.”

Whether it is exactly what Chancellor Merkel wants is far from certain. She as well as Cameron is guilty of shortsightedness. The German leader should realize that her country’s newfound assertiveness is build on a Southern European dependence that will eventually wane. If she seeks a liberal economic order in Europe, the support of the Dutch, the Finns and the Central Europeans alone may not suffice to tip the balance of power in her favor.

Cameron has to confront a highly Euroskeptic party and electorate that is wary of any of any step toward closer union. If he values the tremendous economic benefits of belonging to the single market, why jeopardize it over a European Union budget increase?