If Blair were to dare it, he could win a euro referendum this year

THIS YEAR, New Labour, the most formidable of electoral machines, faces several tests at the hands of the voters. For the first time since Tony Blair became leader its prospects look rather bleak. This has little to do with its current standing which continues to break all records, nor with signs of a Tory recovery of which there are few. Nonetheless every time voters head for a ballot box in 1999, and some of them will be voting often, it is the Tories who are likely to receive a boost and Labour left licking its wounds.

Most of these journeys to polling stations will testify to the pluralism of the supposed control freaks in Downing Street. The Tories will be brought to life again in Scotland in a parliament which will be elected under a form of proportional representation. No longer will it be possible to portray the Tories as a dead parrot north of the border. Courtesy of a Labour government the deceased bird will be partially exhumed.

The European elections, contested also under a form of electoral reform which Hague fiercely opposed, will produce gains for the Tories and possibly heavy losses for Labour. Indeed leading "first past the posters" in the Government are citing already the Euro elections as their moment of vindication. "Enough of these masochistic changes to the voting system," they will declare, rubbing their hands with guilty glee as the seats tumble. The Euro elections were last contested in 1994, when the Tories were in disarray and before Blair started to cast his spell. Indeed, the last time they were held, Margaret Beckett, a great first past the poster, was leader of the party.

In this May's local elections, the Tories can only move upwards. One of the few benefits for them of having been virtually annihilated in 1994, is that subsequent gains can be portrayed in a triumphant light.

So, by mid summer Hague will have a slightly more stable perch on which to cling. The Tories will look a little healthier and Labour less robust after the succession of mid term electoral tests.

Admittedly it would be bizarre if such a prospect did not await a government coming up to the half-way point in the electoral cycle. At this equivalent stage, after the 1979 election, Labour under the recently elected Michael Foot was miles ahead of the Tory government in the polls. Even so a governing party worries about losing popularity, especially when it has enjoyed consistent poll leads and when a rapport with voters is part of its raison d'etre.

There is, though, one poll which could be held this year or next with the potential to propel the Government into even more stratospheric levels of popularity. Consider the political rewards for the government of a referendum on a single currency. Just as William Hague was declaring that the Tories were on their way again, with evidence from the mid summer elections clutched triumphantly to his bosom, their precarious unity would be blown apart.

The perception of Britain being on the sidelines plus a dazzling coalition in support of entry would defeat with relative ease a parochial campaign led by the all-dancing Sun. On the one side Hague, John Redwood, Bill Cash; on the other Blair, his entire cabinet, most Labour MPs, Ashdown and most of his party, Clarke, Heseltine, Howe, prominent trade unionists such as John Monks (whose New Year message bemoaned our absence from the currency), Adair Turner from the CBI and many other prominent businessmen. Compared with a referendum on electoral reform, which looks increasingly remote in the post-Mandelson landscape, such a campaign would be a piece of cake.

As a bonus, these strategic calculations would be based on the correct conclusion: the longer Britain is on the sidelines the more it risks a re-run of the ERM saga, entering at the wrong time economically but when, for whatever circumstances, signing up becomes politically possible. ERM entry occurred when John Major, as chancellor, finally persuaded Margaret Thatcher that the time was right. Britain entered at the wrong time, at the wrong level and for the wrong reasons. With EMU, Britain will join after the election is safely out of the way and when it appears as close as certain that a referendum is winnable, irrespective of the economic case for joining earlier.

Of course in many quarters an EMU referendum is not viewed in such a glowing light. A potentially suicidal risk is the more common perception in the upper echelons of the Government. Polls are ambiguous. The focus groups are still sceptical. The press has not been squared. Rightly they recognise that defeat for the Government would be fatal and Britain's chances of joining EMU would be set back for a decade at least.

But a referendum is always a risk. I doubt if anyone would be able to predict the outcome of an EMU poll in the honeymoon of a second term with any certainty. The case for a referendum before the election is as strong as the arguments deployed in favour of delay.

Yet, apparently the option has been ruled out. When Gordon Brown made his "historic" statement in the Commons in November 1997, stating that entry was not economically viable this side of the election, it was presented as an important step towards EMU. (Spin doctors suggested to the Sun that an appropriate headline would be "Brown Saves The Pound", reflecting the strategic ambiguity as far as the euro is concerned). In reality Brown said nothing especially new. The declaration that Labour saw no constitutional objection to entry, Brown's main theme, was made by Tony Blair in a Commons debate in March 1995, long before the last election.

The origins of that November statement is still shrouded in some mystery. But one of those who argued that a door to entry should be kept open before the next election was Peter Mandelson. The Treasury has always insisted that those of us who interpreted Brown's statement as still leaving a slight room for manoeuvre were wrong: The door was firmly shut this side of the election, insist Treasury insiders. Even so, there is a get out clause, or rather an "opt in" one, as Brown stated that "unforeseen economic circumstances" could necessitate a change of plan.

If the process looked as if it would galvanise the Blair project by modernising Britain's place in the EU, underlining the benefits of closer co-operation with Ashdown's Liberal Democrats and splitting the Tories, could it happen before the election? If Mandelson saw the gap and persuaded Blair to go for it, he would have had more influence as a backbencher than anything accomplished at the DTI.

It probably won't happen. This is not a risk taking government. But as the benefits become more evident, Blair may begin to regard the single currency as an unexpected ace amidst mid-term electoral misfortunes.

Steve Richards is political editor of the `New Statesman'