There is no question which side is setting the pace in our parochial debate about the euro. The Eurosceptics may lack charismatic figureheads to lead them all the way into the far-off referendum campaign, but with the Sun, the Mail and most broadsheets firmly on their side they have achieved a major coup. Even before the euro is up and running the argument in Britain is already fixed on the terrain marked "tax".

This was not part of the Blair/Brown masterplan when they ruled out joining the euro in this parliament just over a year ago. They hoped then, and still hope now, to prepare public opinion for entry by stealth, an understandable attitude after 18 years of Europhobia. Until recently there were signs of progress. When Peter Mandelson spoke of the "galvanising" potential of the euro, it caused no stir whatever. Nor did anybody seem unduly alarmed when he returned from the US last month to report that American firms were expressing worries about Britain being outside the single currency. In the Treasury, meanwhile, Gordon Brown has been telling firms to prepare for the euro.

But this is all subtle stuff, the deployment of arguments by nods and winks. To be sure, senior ministers have moved the debate on from the dying days of the Major government when even half a nod from Ken Clarke would shake the administration to its fragile foundations. Yet as new Labour pushes middle England gently away from its anti-European prejudices, the debate on the other side is reaching new heights of frenzy. And the longer the hysterical claims go unanswered, the more likely they are to become embedded in voters' minds. William Hague has not had too much to smile about during his leadership, but the prospect of higher taxes merging with EMU as a political issue will do him more good than a thousand image consultants advising him on baseball caps. It would be the double whammy of his dreams.

The word "tax" continues to send shivers down the spines of new Labour strategists. It is possible that the government will reduce basic rates in the run-up to the next election to reassure any doubters. But now the spectre of tax haunts ministers again in the context of Europe, another issue which they neutralised at the election with the help of a bulldog and the flag of St George. Neither the beast nor the emblem can be invoked with any credibility in the next campaign.

It goes without saying that the fears being generated by the press are based on either false suppositions or irrational ones. No one in Europe is suggesting that income tax levels should be fixed across the EU. Some leaders want a framework of rules for some taxes so that the single market can function fairly and effectively. They have been doing so for quite some time. It is true that last week the Austrian finance minister, Rudolf Edlinger, argued that governments should "avoid harmful tax competition". Like his German counterpart, Oskar Lafontaine, Edlinger suggested that the European single currency might create pressure to align wages and taxes. He has been making this point for much of the year. His draft manifesto on which the argument was based has been available since the spring, and was approved by most European finance ministers in October. On quiet news days the Mail and the Sun return to it to create front-page scare stories. Indeed, both newspapers now run anti-euro stories as a matter of course when there is no obvious lead elsewhere. Last week the Mail ran five such leads in the space of seven days. On the only day it did not (the morning after the Queen's Speech) the Sun helped out by dubbing Lafontaine as the most dangerous man in Europe, a theme it returned to this week with its "Foxtrot Oskar" front page (with the first letter of each word in bright red).

The sceptics distort not only the plans being considered by some EU leaders, they imply that if Britain ignores the whole damn "socialist" process it will be free to carry on as if nothing was happening elsewhere.

But even before Lafontaine and co have had their evil way, the sovereignty and independence of EU governments are severely constrained. None of them can just pluck taxation policies out of the air. They have to take account of policies being applied in competitor countries. As Leon Brittan once observed, when a similar debate was raging over our right to determine interest rates, Britain's sovereignty lasted precisely half an hour, the time it took us to increase or reduce rates in response to the Bundesbank.

The problem in Britain now is not the lack of answers to the shrill onslaught from the tabloids, but the reluctance of ministers to provide them. This is why the debate is so one-sided. Last week we had the Mail and the Sun screeching away in one corner while, in the other, a group of business leaders were quietly endorsing the euro in the FT. Blair is right to regard business leaders as pivotal in the debate, but even the names viewed with such glowing admiration in Downing Street lack the clout in the media that he and his senior ministers enjoy.

Yet while Eurosceptics rage with uninhibited fury, ministers respond by stating that Britain would sign up only when the economic case was "clear and unambiguous". Now, threatened with a new "tax" label, they can declare only that they oppose "harmonisation". Any attempt to contextualise the scare stories risks the appearance of endorsing them.

Senior ministers have been giving some thought about whether, and how, to sound "warmer" about the euro once it is launched next month. Given that their fence-sitting is not sustainable all the way to the election, they might as well start putting the case more enthusiastically now. Otherwise they risk facing a more Eurosceptical electorate in a few years' time than they did in 1997.

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