So, the future direction of the Labour government is being decided this summer. As ministers innocently head off for the villa poolside and a well-earned collapse, their bags full of Nick Hornby, Zadie Smith and even Edwina Currie, the real action will be taking place back home. It will be happening away from the cameras, in the privacy of some of the most Conservative conservatories, around the most Tory kitchen tables, and on the most Eurosceptic sofas in the whole of Britain.

For the centre left in British politics is making a big mistake when it relegates the Tory leadership contest to an irrelevant, half-sad, half-comic sideshow that can safely be left to the leader-writers of the Daily Telegraph. It is, in fact, of considerable importance to how Tony Blair, Gordon Brown and the rest of them steer Labour through the next few years. They may not know it, but those 330,000 silver-haired Tory activists, anxiously comparing the blemishes of Ken Clarke and Iain Duncan Smith, have Labour's direction in their shaking hands, too.

A number of things seem back to front in politics at present. For a start, the Tories' timing is all wrong: they should have chosen Clarke last time round and that promising youngster, William Hague, this time. Then there's the paradox that, while the Conservatives are trying desperately to work out how to connect their party to the nation at large, Blair is desperately trying to work out how to connect the national government to his own party. Certainly, at his private end-of-term meetings with ministers, he told them he needed to re-engage the party and government machines; and he wanted them to be more, not less, political.

Which brings me to a third apparent contradiction - that a victory for Clarke, the heavyweight in the Tory leadership battle, will be the best possible news for Labour. Yes, I know it's argued that he will roast Blair at the Despatch Box. So he might. But who gives a fig about the weekly ritual that is Prime Minister's Questions anyway, apart from a small gang of journalists (myself included) who make a modest buck by sitting in television studios and commentating on the spectacle? Look what parliamentary wit did for Hague.

Beyond that, yes, Clarke does have charisma, as well as a talent for bluff, saloon-bar plain speaking that the public will appreciate, and may well prefer to Blair's more controlled demeanour. Despite his pratfalls in government, Clarke will have far more credibility when he mocks new Labour for its performance on the NHS and schools, and its dislike for parliament. Make no mistake, Clarke would cause Labour real pain.

But fundamentally, a Clarke leadership would jerk British politics a little back towards the centre. His greatest gift to Labour would be an end to its persistent cowardice on Europe. For you have to ask: just what is the Labour leadership up to? The divide on the euro has become the row that dare not speak its name. The more the leadership tries to put the lid on the argument publicly, the more it explodes out of the sides in private. And , of course, often in public as well.

The latest twist has some ministers raging about the "news" that, addressing a private conference earlier this month, the Chancellor's most trusted adviser, Ed Balls, appeared to rule out a euro-referendum this side of the next general election.

Those in the pro-euro movement are now close to despair. Having expected their moment to come after the June election victory, they find they are still on hold. Yet trusted journalists are still being hauled into Downing Street, emerging to assure us, magisterially, that the euro is still very much a live issue. Over two consecutive days, I have been told by one junior minister with close links to the Foreign Office that a referendum will certainly happen within the next 18 months, and by one cabinet minister, whose brief is entirely domestic, that it most definitely will not.

Who am I to believe? Who are the public to believe? And all the while, Treasury spokesmen assure us with insuperable wit that "our policy on the single currency is absolutely clear". Like mud is clear.

With Clarke as Tory leader, all that bluster would quickly be exposed. The government would have to come off the fence, or face ridicule. Clarke would state his own pro-European case, and allow others in his party to state their own, opposing views. There would be very heavy pressure on Labour to do the same. So we might at last do away with the fiction that Blair and Brown have identical views on the euro.

This would be healthy: in the end, I still believe that the one thing that could dish the Labour government is its extraordinary talent for making a fairly decent crowd of hard-working men and women look like a gang of lying, superficial control freaks who can't ever say what they mean or mean what they say.

Now consider the alternative. Duncan Smith is emerging, almost daily, as seriously right wing - a hanger, a flogger, a supporter of education vouchers, an advocate of private involvement in the public sector, and an adamant opponent of anything European, let alone the euro.

If he wins the Tory leadership, the centre of political gravity in this country will be pulled sharply to the right. He would provoke and stir up all Blair's most conservative views. He would scare Labour into more dither on the euro for at least another parliament.

This Tory contest is not just an internal bicker. It will affect Labour very much indeed. To all those MPs and ministers enjoying the break, while the heat (politically, at least) is off them, I say this: think of Clarke as he attends yet another chicken dinner in Cumbria, a cheese and wine party in Surrey - and raise a glass of Chianti to him.

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