Blair goes in to bat against the Euro XI

Tony Blair goes to an EU summit in Luxembourg tomorrow to fight Britain's relegation to an EU second division through exclusion from Euro-X, a new club for members of the single currency. Compromise is in the air. But Katherine Butler says a face-saving summit deal will not rescue Britain from the political margins once the euro is launched.

Diplomatic efforts will intensify today to avert a showdown at tomorrow's Luxembourg summit over Euro-X, the planned currency club which is likely to include all the EU's 15 members apart from Britain, Sweden, Greece and Denmark. Failure to patch up the first real rift between the new government and Britain's EU partners would be a serious defeat for Mr Blair which would expose Britain's marginalisation and mar the launch of its forthcoming EU presidency.

Despite insistence from Downing Street last night that Britain was still demanding full membership of the grouping, there were signs of compromise. French, German and European Commission officials were venturing to predict a deal can be done which will allay the fears of the four "outs" that they are being excluded from decision- making.

One possibility is a summit declaration that decisions, as opposed to debate, will remain in the hands of the EU Council of finance ministers - which includes Gordon Brown, the Chancellor. The four "outsiders" could meanwhile accept an invitation from the French and Germans to attend meetings of Euro-X when matters which affect them are being discussed.

Alternatively, the 11 "insiders" could agree to limit their private discussions to a short list of areas where they have a genuine need for confidentiality - for example, the exchange rate of the euro against other currencies, sanctions to be imposed on high-spending governments which flout budgetary discipline, and technical issues relating to the euro.

Excluding Britain from exchange-rate discussions is justified on grounds that Mr Brown does not have access to Bundesbank deliberations, even though the value of the mark has a profound effect on sterling.

Agreement along these lines would require some compromise from the French, who have been leading calls for the remit of Euro X to extend to such areas as taxation and labour-market policies. It would also allow Mr Blair to emerge with some pride intact, climbing down from the high horse raised by Mr Brown while at the same time claiming he had seen off a direct threat to Britain's influence. Most of the "in" countries recognise that he needs a political figleaf and because this is Labour, not the Tories, they are happy to provide it.

What they are still not prepared to do is grant Britain and the others the automatic "voice at the table" or the right to block plans that Britain wants. French officials were adamant yesterday that there would be a two- tier structure. "There is little point in a body to link the Eurozone members if those not inside the currency can also attend," said one source.

The irony of any settlement which emerges at Luxembourg is that Mr Brown could have secured as good a result at the last meeting of EU finance ministers in Brussels 10 days ago. He was offered an "ear at the door," a guaranteed flow of information, and that the new body would be rooted in EU structures which would have provided legal safeguards to the "outs".

EU diplomats say Mr Brown "overplayed his hand", by stubbornly sticking to his demands for "full participation" and issuing veiled threats that Britain would launch a "sandwich war", blocking the right of the "ins" to use EU catering facilities for their talks. The public spat he insisted on merely raised the profile of Euro-X, strengthened the resolve of the others and exposed in blunt terms the extent to which non-participation in EMU carries the price of political exclusion.

French talk of bedrooms and married couples not wanting intruders between the sheets may have strained the imagery but Britain's decision to rule out a decision on joining the Euro for now really does threaten to leave British ministers straining at the keyhole. What the row shows, ministers from other countries believe, is that Britain simply has not woken up to the reality of what a single monetary policy among 11 countries will entail.