How to solve the euro dilemma

As the deadline for the decision on the single currency looms, Ed Crooks offers a way to keep everyo

Unlike the football premiership, the government's battle over the euro remains contested up to the last day of the season. Widely reported claims that Tony Blair and Gordon Brown had agreed to rule out entry for the remainder of the parliament have been revealed as premature triumphalism on the part of Brown's allies. The final decisive games have yet to be played.

The government has had more than two years to work out a position on the euro since Blair set a deadline for delivering a second assessment of Brown's five tests. But like students facing an essay crisis, it failed to buckle down to the task until almost the last possible moment. Now it has only four weeks left.

That the verdict of the assessment will be some form of "not yet" is no longer open to doubt. The question is how the deferment will be presented. Brown wants entry to be ruled out until after the next election; Blair fears such an unambiguous rejection risks letting the government's line slide from "not yet" to "not bloody likely".

All sorts of compromises have been suggested. But nobody, apparently, has yet put forward the only solution that could possibly work. The referendum must be held, and the referendum must be lost.

This case is, I admit, a tough sell. To embark on a referendum expecting, and indeed hoping, to lose might seem folly on a heroic scale. But think about it. All other options are equally unattractive, or worse. Like the purposefully cack-handed plot at the heart of The Spy Who Came in From the Cold, a referendum campaign that ended in ignominious rejection by the public could be the most brilliant gambit of all.

For Blair, a referendum is the only outcome that does not look like some sort of defeat. He has given so many assurances of his enthusiasm for joining that he cannot again allow Brown to kick the decision into touch. Some big inward investors, as a result, have been making decisions in the belief that the government was committed to joining the euro in the foreseeable future. If that belief proves mistaken, they will feel betrayed. In Europe, too, Blair and Brown have traded on the impression that Britain is a euro "pre-in" rather than an out. A formal decision to stay out would suggest a determination to remain on the margins of the EU.

For Brown, the important thing is to keep Britain out, for the time being at least. As any reputable economist will tell you, the balance of costs and benefits from joining the euro cannot be judged beyond all reasonable doubt. Even supporters of entry admit it will lead to "greater volatility of output": in other words, the economic cycle will have higher peaks and deeper troughs. For the Chancellor, who promised "no return to Tory boom and bust", the prospect is alarming.

So the government should send a strong signal to inward investors and the rest of the EU that it is still committed to the euro, while not actually joining. A statement of intent in principle would be too weak: it has done that before. Only an actual referendum will do. The risk that the public will fail to follow this script can, I think, be discounted. True, the majority in the polls against entry is not quite what it seems; many could indeed be persuaded. But the idea that Blair's personal standing will be able to sway enough doubters is frankly incredible. In the bright summer of 1997, perhaps, but not now.

One can imagine the campaign: Blair all bouncy and committed, Brown just lugubrious enough to make it clear he has been dragged into a hare-brained scheme against his will. But it will make everyone happy. It is what the pro-euro campaigners want; it will please the anti-euro press because it will be lost. For Blair, it fits with his new career as a man of principle. Over Iraq, he stuck by what he believed, against polls and focus groups. He can show that this was not a momentary aberration.

Conventional wisdom has it that Blair cannot afford to suffer such a defeat. If the Tories looked like a credible alternative government, that objection might have force. As it is, Blair's and Brown's future depends on whether their tax rises have made enough of a difference to health, education, transport and crime, not their opinions on cyclical convergence and optimal currency areas.

They should probably get the unpleasantness of the defeat out of the way as soon as possible: this year for preference. But the result can have little bearing on a general election in 2005. By then, Blair could look back at 2003 with the warm glow that comes from being certain he did the right thing.

Ed Crooks is economics editor of the Financial Times