Rupert Darwall: Only Mr Clarke can challenge the Blair consensus

When John Smith died in 1994, it was clear that if the Labour Party was serious about winning, Tony Blair would become the Labour leader. It was a simple, straightforward test. Now it is the Conservative Party facing a similar test. If it is serious about surviving, it will elect Kenneth Clarke to succeed William Hague.

I hold no personal brief for Kenneth Clarke. The first thing he did on becoming chancellor was to sack me as adviser. I disagree with him on many issues, notably European integration, but also his unimaginative views on reforming the public services. Nonetheless, Kenneth Clarke is the best man to lead the Conservatives.

The challenge for the Conservative Party is responding to the new Blairite consensus. That consensus is conditional on the electorate's tolerance of paying more tax ­ but not higher income tax rates or extension of VAT ­ in return for a transformation in the performance of public services, especially schools, hospitals and rail.

In the past, the Conservatives have responded to the dominant consensus in one of two ways. They have challenged it, which Margaret Thatcher did in the 1970s, overturning the Keynesian, interventionist consensus. Or they can accommodate themselves to it and modify it, as Rab Butler did in the 1950s.

My preference as a free-marketeer is that the Conservatives should challenge the new consensus. The Blair consensus is not durable. The big question of the second term is whether Mr Blair can deliver his side of the bargain. Public sector reform involves much pain and little gain. The economy could well soften. The insatiable appetite of the public sector for cash makes it likely we'll see further large tax increases. Given that backdrop, a confident Conservative Party which had the public's trust could win the argument that providing healthcare free on the point of demand is the main reason why the NHS doesn't provide high quality healthcare. It could advance a tax reforming agenda that reduced people's dependence on tax-financed public services.

But there is little prospect of a Tory leadership candidate marked out as a consensus challenger to push this agenda. Michael Portillo is now positioning himself as a consensualist. That being so, who is the more plausible Rab Butler ­ Kenneth Clarke or Michael Portillo? Paradoxically, having Kenneth Clarke as their leader would enable Tories to be bolder in their approach to the public services. The public knows that he is not ­ never has been ­ a Thatcherite radical. By contrast, the Tories under Portillo would always be nervous about opening themselves to attacks from Millbank on how harsh life would be on Planet Portillo.

But what about the euro? Surely that is an insuperable barrier for Kenneth Clarke. True, Michael Portillo's views on the euro resonate with the party as a whole. Only last week, the electorate demonstrated that it could put the euro into a separate box marked referendum. If it did, so can the Tories. Harold Wilson used the 1975 referendum to keep his government united even though ministers had different views on Europe.

The hard truth is that the anti-euro campaign does not need the Tories and would be better off without their active involvement. The Tories should accept that being against the euro is not exclusively their issue. They should out-source the anti-euro campaign to David Owen and Business for Sterling. Both sides would gain. The No campaign would not be identified with the Conservative Party ­ a big negative ­ and the Tories could demonstrate they're not obsessed with Europe.

As chancellor, Kenneth Clarke was inclined to outbursts of inflammatory Europhilia, designed, so it seemed at the time, to provoke the rage of Eurosceptics. To have a chance in the leadership contest and keep the party united, he would have to accept that Europe is an issue on which reasonable people disagree. He would also need to agree that future treaties involving substantive integration should be subject to approval in a referendum.

The fact that the Conservative Party is not a strategic asset worth having in the euro campaign (aside from the referendum funding rules) is the pre-condition for Conservatives with opposing views on the euro being able to work together. It removes the only big negative from a Clarke leadership bid.

It should be obvious that electing Kenneth Clarke would do more than anything else to demonstrate that the Conservatives had reconnected with the outside world. Instead, the shadow cabinet's rush to endorse Michael Portillo shows how isolated the parliamentary party now is. It should ask itself who Tony Blair would most fear having across the despatch box: which Conservative politician is best able to defeat all that can be thrown at him by the most formidable fighting machine in modern British politics?

Since the war, only one government failed to win a second term, but only two won a third. Politics is likely to get tougher and nastier in the second term. Now is not the time for the Conservative Party to take risks and live dangerously. It will not survive another large defeat.