Since the spiral of escalation is made of a disconsiderate small escalation (book burning) and a disproportionate large escalation (terrorism), I'd argue most of the onus for a destabilisation lies with terrorists and giving in arbitrarily sets a bad example for any other communities e.g. "hey, the only way any of these people will do what we want is with violence".

I like Finland's solution: throw public book burning together with "hate speech" or threatening people in public laws (since these guys know they're doing this to both threaten and tease Muslims in public) and this way you're not favouring Muslims for having a few unhinged idiots who are willing to go too far beyond every other community's unhinged idiots.