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The European Council's nomination of Jean-Claude Juncker, the former prime minister of Luxembourg, as future European Commission President appears to be a crushing defeat for British Prime Minister David Cameron. Indeed, his attempt to block Juncker's nomination was clumsy and ill-considered: it alienated potential allies and shored up support for Juncker among fence-sitters in other member states.

In the U.K., euro-skeptic and opposition critics pour scorn on the prime minister. They claim that his failure to block Juncker demonstrates how little success he would have in securing reforms to make the EU more competitive and to bring powers back from Brussels to London - power over labor markets, for example. Without such reforms to placate euro-skeptics, many now see the U.K. heading toward the EU exit door. If Cameron wins next year's general election, he has promised an "in-out" referendum on Britain's EU membership in 2017. The Juncker affair, the PM himself suggested, makes it more likely that such a referendum would presage U.K. withdrawal.

This may well be borne out by developments over the next couple of years, but several signs point in a different direction. European leaders have expressed remorse at the way in which Juncker's nomination took place. In private, many doubt whether he possesses the vitality and vision to cope with the challenges facing the EU. Much of the heavy lifting will be done by his German campaign manager and future chief of staff, Martin Selmayr. It is rumored that Juncker himself would have preferred the more sedate post of president of the Council. But German Chancellor Angela Merkel could not resist the argument that the head of the "winning" center-right political alliance in the June European Parliament elections must be nominated Commission president.

Last week's Council conclusions hint, however, that this will not necessarily be a precedent. Heads of government may in the future reassert their own prerogative to choose the Commission president instead of ceding to the European Parliament. National leaders also dislike the precedent that one of them may be outvoted on an issue which s/he considers a vital national interest. They propitiated the British by acknowledging in the Council conclusions that "ever closer union" may not be for everyone.

The German finance minister has spoken of the importance his country attaches to Britain remaining within the EU. Indeed, without the U.K., the EU's weight in world affairs, and in international financial markets, would be much diminished. Free markets are a cornerstone of German and British economic policy. Both support the Transatlantic Trade and Investment Partnership now under negotiation between the EU and the United States, though German public opinion is wavering, following revelations about U.S. phone-tapping. An EU without Britain would be more statist and interventionist; France and Italy would find it easier to resist calls for structural reform. There would be less support for the fiscal rigor that the British and German governments still consider necessary to promote growth and avoid another financial crisis.

The Spanish prime minister is particularly worried about separatism in Catalonia, which plans to hold its own (unconstitutional) referendum on independence. He and other European leaders would be dismayed if Cameron's failure in Brussels inclined more Scottish voters to vote for independence in September's referendum.

Sorting out the political and legal mess of Scottish secession from the U.K. and British withdrawal from the EU could dominate Juncker's five years as Commission president. To avoid this, EU leaders might now prove more accommodating toward the British prime minister. There are many more pressing challenges on the EU's agenda including unemployment, the euro, global competitiveness, and energy security, as well as Russia, Ukraine, and the Middle East.

Britain may have a better chance now of securing an important portfolio in the new Commission, provided Cameron puts forward a convincing candidate. Key priorities for Britain include anti-trust and competition policy as well as internal market and financial regulation. Another appointment to watch is the next Commission secretary-general for which Britain has a couple of credible contenders. If a Brit were appointed to this key post, Cameron could claim that he had enhanced British influence in Brussels.

The Juncker affair could actually help keep Britain in the EU. To improve the chances of this, Cameron must keep his own increasingly euro-skeptic party under control and rebuild trust with his natural allies in Europe. He made a good start with Juncker himself during a warm and pragmatic conversation after the European Council meeting. His focus should now switch from personalities to policies. Above all Cameron and his EU colleagues need to face down the populists and take fresh initiatives that will provide tangible benefits to the diverse peoples of Europe.