Blair's money problem: the euro felled the Tories. Is Labour next?

For both its critics and supporters, the euro's smooth transition and early economic success have been a shock. While the euro may be economically viable in the short-run, it's the sort of political dirty bomb that has politicians across Europe looking to the door and over their shoulder. Its shrapnel already has splintered one party and it threatens another. And that's just in Britain.

It's no secret that the Tory fratricide on European integration has led to disasters at the polls. While the majority of Britons remain skeptical about the abolition of the venerable pound, forces within the Tory Party are sharply divided on the issue, miring the party in political muck. The last two general elections have delivered huge margins to the Labour Party in Parliament. Indeed, towards the end of last fall's contentious Tory leadership race, the eventual winner, Iain Duncan Smith, said of his own party's division, "We need this like we need a hole in our head."

But amid the sound and fury of the Tories' infighting on the euro, Labour's own divisions regarding the currency have gone largely unnoticed. Like the conservatives' cleft, Labour's split is more about politics than economics. Unlike the conservatives' euro woes, Labour's are just beginning.

Since its victory in 1997, Labour's official line on the euro has been that the government would never force the European common currency on its citizenry; it would let the voters decide via a national referendum, to be announced at a later date. Despite Labour's protestations of neutrality, no one doubted that Blair and, to a lesser extent, his Chancellor of the Exchequer Gordon Brown, were in favor of adopting the euro. Sure, the trade unions (Labour's old base) are mostly skeptical, but the mercantile class (Labour's new base) is aggressively in favor. Thus far, the biggest debate within the Labour party has been not a question of if, but when.

At the beginning of his tenure, Blair happily fobbed the timing of the referendum to Brown. Brown, it was decided, would be the keeper of the mythical "five economics tests" on whether Britain should adopt the single currency used by 12 European countries. As the chancellor later spelled out, integration must be "good for jobs, for foreign investment, for the City," and based on "whether the UK economy was marching in step with other European countries, and whether it had enough flexibility to adjust if it wasn't." Once the tests were met, the matter would be put to a national referendum.

Central to understanding New Labour's rise to and retention of power is the relationship between Brown and Blair. At a 1994 lunch at the posh Grantina restaurant in north London, Brown and Blair allegedly reached an arrangement. The telegenic and witty Blair would head up the opposition and the brainy Brown would be his shadow chancellor. After two parliaments--that would be three victories at the polls--the young Blair would step aside and make way for the even younger Brown. Before the torch was passed, the two of them would have lashed Britain's economy to the European Union.

But in the last few months, relations between the two have grown frosty. While Brown suspects that Blair plans to renege on their Grantina deal, many of Blair's advisers and parliamentary loyalists are convinced that Brown is out to undermine him. This could mean two things. The euro--and their plans for it--may be the first casualty of their diverging relationship and ambitions. Alternatively, their relationship may be the latest of the many political casualties wrought by the euro.

That their relationship is no longer as chummy as it once was is the subject of speculation among Westminster political junkies and City pinstripes. Everyone, for example, has noted Brown's deafening silence as Blair weathers a variety of sleaze and fundraising scandals. Then there's the chancellor's latest budget, brazenly geared toward the Old Left in what Blairites view as an effort to curry favor among rank-and-file Labour Members of Parliament. Further, most of the dovish Labour MPs, rankled by Blair's shoulder-to-shouldering with U.S. President George W. Bush, claim Brown is in their nest--a perception Brown has down little to correct.

Things weren't always so contentious between the two. When Brown announced the five economic tests in October 1997, Blair seemed perfectly at ease with leaving the biggest issue of his premiership to the economists and civil servants in Brown's chancellery. Since then, Brown has insisted that his five economics tests--and nothing else--will determine whether or not voters decide on the euro. Blair, ever the control freak, is growing jumpy. And with good reason: Blair is reputedly worded that Brown is more interested in replacing him than in replacing the pound with the euro.

As late as April, Brown was clinging to the myth that the referendum would be based on economic data, not polling numbers. His warning that "to short cut or fudge the assessment of the five tests" stung those eager for the referendum. Brown seems to relish reminding everyone that "to join in the wrong way or on the wrong basis without rigorously ensuring the tests are met, would not be in Britain's economic interest." He is prickly about marking his territory.

Of course, the economic viability of the five tests has been questioned from day one. Labour MPs on both sides of the debate agree that the tests are nothing more than political cover. "There's no way anyone can claim the tests have been met `clearly and unambiguously' as the Treasury have said they must," said Labour MP Ian Davidson. And Peter Kilfoyle, a former Defense Minister and powerful Labour tactician, puts it this way: "It is now a matter of political will. I think the tests, however they are defined, can be met and it is a matter of what is the most judicious time to go for a referendum."

For Blair, the time is now. In mid-May the prime minister again made moves to put the referendum on his timetable. Surprisingly, Brown did not dispute it. But he's shown that he's not afraid to rein in his prime minister on this matter. There will be no surprise among Blairites if Brown makes a public display of dragging his feet for one reason or another. And he has little to lose by defying the prime minister.

The cause for Blair's recent boldness may have been a poll (conducted by Clinton administration pollsters Philip Gould and Stanley Greenberg) that showed, for the first time, more than 40 percent of the public support Britain adopting the euro. "The fact that more than 40 percent of the country is now prepared to vote yes represents a kind of milestone," read the accompanying analysis. "We still trail significantly in the euro referendum but now seem in reach for the first time." Three days after he saw the poll, Blair announced his preference for a referendum "sooner rather than later." Indeed, according to a leaked memo by Simon Buckby, the director of Britain in Europe, holding a referendum sometime next year is practically a done deal. His group has even set a date: the first of May.

Once a date is set, no one knows just how nasty the politics will get. But if the Tory infighting is any sort of prelude, it will be bloody. Offering a hint of what's to come, in April a group of 30 Labour backbenchers and several peers celebrated the formation of Labour Against the Euro. Their open defiance could become an embarrassment for both Blair and Brown.

In another development, the Greens have announced that they will work with the Save the Pound campaign. Alan Laing, who heads the left-leaning anti-euro New Europe, hopes that the Green opposition will be the "No" campaign's secret weapon. "We are going to make being anti-euro fashionable by the summer," Laing has promised. And Green Member of European Parliament Caroline Lucas says: "We have got to break down the perception that it is a Tory issue."

Blair may take this all in stride. When asked if he would mind being remembered as the Prime Minister who surrendered the pound, Blair struck a defiant tone: "I would have no problem with history recording me as the person who said to the British people, `It is in our interests for us to be a key and major player in Europe and here is something that is in a single currency, is in our economic interests to do so.'"

Independent of all the political positioning, Britain's private economy may make a decision about the euro on its own terms. The idea that adopting the euro is really just a matter of "inevitability" has long been part of the pro-euro vocabulary. So when the Bank of England reported in late May that the Euro had eclipsed the dollar as the most widely used foreign currency in Britain, opponents feared that "euro-creep" was fast underway.

When Blair hinted that a referendum date was nearing, both pro and anti-euro Conservatives urged him to do it. Some Tories feel vindicated that the politics of the euro have come back to bite Blair and his clever chancellor. While no one expects a public fall-out between the two just yet, suspicion between the principals and their allies runs high.

If Brown does assume a more public opposition to Blair on the euro--both on the timing and the substance--he'll find some strange allies. For example, David Blunkett, the Home Secretary has said that a referendum in this Parliament would be unwise. Blunkett is also another possible successor to Blair, forcing Brown to worry about Blunkett as he waits for Blair to honor his Grantina agreement.

And if Labour bungles the referendum--if it fails--then they may be voted out of office. The fractured Tories can hardly wait and neither can Blair. While Blair is impatient for a referendum, Brown seems less so. But the chancellor is impatient to replace to Blair. If either moves too swiftly on the euro, neither will get what they want. The big winners could be the Tories, finally vindicating that the euro is radioactive for any party that touches it.

Mr. Nichols is a reporter for Insight Magazine in Washington, D.C.