This is a mistaken understanding of what the button does, and what the window is for.

• The link button *creates* a link if there is none there already.
• Once the link is created, we then also pop up a link editing window
• This is to let you change the link to point to a different place, or remove it.
• Pressing escape closes the editing window, leaving you with the link you created.

This is intentional design. Escape isn't "applying" anything, but it's probably not very clear. Maybe design would like to comment?

Unfortunately I agree with BOTH of you.
I am often confused by the behaviour of the link dialogue and am often looking for the "insert" or "confirm" button. "Done" doesn't seem right to me somehow.
On the other hand, James is right too. The behaviour of all the formatting icons on the toolbar is that as soon you press them, the action takes place. So, highlighting a word and pressing "bold" will cause the text to go bold immediately, not after a second 'confirmation click'.
Nevertheless, despite intellectually understanding the link dialogue design, I keep stumbling on it - it gets in the way and I have to consciously think about it - which is not good behaviour for a labor-saving device.

Not sure if I'm adding further confusion :)
(and I think this task didn't keep T101176 into account?)
but from what I'm reading at the German Wikipedia,
some would find it desirable that ESC allowed to leave the "blue" link area after a link is added and placed the cursor just at the right so that people can quickly start typing again.

Currently, hitting ESC right after choosing a link target doesn't close the link tool - it prompts the "Are you sure?" dialog to leave the page entirely.
Also, to get out of the blue area just via the keyboard, you need to hit the right arrow twice (which doesn't seem much intuitive).

Yeah, that's T52868: Escape key inside the main editor should cancel VE mode and return to action=view.