You're argument re. this negotiation is sensible and perfectly logical. Sense and logic dictates that the two sides compromise and meet in the middle.
However, emotion plays a big part in politics. And I fear that the big hitters in the EU will take a deal that might be worse economically for them in the short term if it means that, long-term, there is a stronger political union of the EU nations. Politically, they can't let Britain have their cake and eat it.
For the Tories, they are making a big nationalist play right now and it is popular with voters. I'm not convinced they will give that up.
We'll find out!