Dropping the Pound: Blair, Brown clash on the biggest issue of all

A damaging rift has opened between the Prime Minister and Gordon Brown, Chancellor of the Exchequer, over membership of the European single currency. Our Political Editor reports on the makings of a political and economic crisis.

The Treasury is trying to bounce Tony Blair into a decision which could lead to the early death of the pound. Sources close to the Chancellor of the Exchequer are actively briefing selected reporters that Mr Blair is poised to announce early membership of the single currency, as soon as possible after the first-wave launch in 1999.

The briefing was again repudiated by the Prime Minister's office yesterday, but the repeated reports are feeding City and Tory suspicion that Parliament, the markets and the voters are being softened-up for the abolition of sterling.

In fact, there are signs that the Chancellor, Gordon Brown, could be over-reaching himself, by trying to bounce the Prime Minister, the country and sterling into a single currency. Mr Brown, who is said to regard himself as the Government's managing director - with Mr Blair as non-executive chairman - could be underestimating the Prime Minister's political determination not to repeat past mistakes, particularly the disastrous decision to join the European Exchange Rate Mechanism in 1990.

While Mr Blair appears content to give the Chancellor his head on issues like Bank of England independence on interest rates, he has been known to veto some of Mr Brown's more head-strong judgements - like his pre- election plan to introduce a 50p higher-rate income tax band for the better- off.

Mr Blair rejected that proposal because it smacked of the high-tax image Labour had fatally presented to the voters in 1992, under Neil Kinnock.

The Prime Minister maintains a highly political caution about early membership of the single currency, and Mr Brown is risking the kind of open split between No 10 and No 11 that led to the eventual resignations, as Chancellor, of Peter Thorneycroft in 1957, and Nigel Lawson in 1989.

Some ministers say Mr Blair would want to square Rupert Murdoch and his newspapers - particularly the Euro-phobic Sun - before he even thought of putting the single currency issue to a referendum of the electorate, as promised in the May manifesto.

But a Treasury-inspired report in yesterday's Daily Mail said Mr Blair would use the opportunity offered by a European summit in Luxembourg on 21 November to announce the decision to join the single currency "as soon as possible" after its 1999 launch.

Although it provided more detail, the Mail report was virtually identical to a front-page story carried by the Financial Times on 26 September - which added more than pounds 30bn to London share values, and knocked four pfennigs off the value of the pound.

The Financial Times report was heavily denied by the Prime Minister's office at the time, with a spokesman saying it was "speculation, but wrong. There is no change in government policy".

It was also denied by the Treasury, which described it less robustly as "speculation". But yesterday's Mail said: "Mr Blair's move is a victory for Gordon Brown, a long-time enthusiast for a single currency.

"He has put enormous pressure on the Prime Minister who has prevaricated for months over a decision he fears could make or break his premiership."

The line from No 10 was, again, that the Government's position had not changed. Mr Blair told The Independent last month: "We have said that we will keep the option [of joining a single currency], and we will obviously keep it open ...

"If we want to retain any influence in shaping the debate on the single currency, then it is essential that we remain open to the possibility of entry, though as I have said before I think it is highly unlikely that we will be in the first wave."

Because European Union members will have to make a judgement by next spring on which countries can join in the first wave, the Government will have to make a statement before the end of the year on whether it plans to apply for first-wave membership.

The British open option does not require an early commitment to membership - although even the most Euro-sceptic ministers, like Robin Cook, the Foreign Secretary, have said it would be difficult, if not impossible, to remain outside a proven, successful single currency.

Peter Lilley, the shadow Chancellor, said yesterday: "If it is not in Britain's interests to join now, it would be illogical to commit us now to definitely join at some future date."

But he added: "Once again, the Labour government is playing party politics with critical national decisions.

"The British people are entitled to clear, on-the-record statements from the Chancellor, rather than off-the-record briefings to the press by Mr Brown's spin-doctor-in- chief, Charlie Whelan.''

At a meeting with EU colleagues in Luxembourg yesterday, Mr Brown himself stuck rigidly to the official government line.

It was "very unlikely", he said, that the United Kingdom would join the euro at the start of 1999, because of the "formidable obstacles" the switch from the pound to the euro would present.

Mr Brown then avoided any predictions about the future, insisting that the Government's wait-and-see position had not changed.

Mr Lilley said: "They know that they cannot win the argument for joining a single currency in the foreseeable future openly, so their policy for the pound is death by a thousand briefings ..."