Prime Minister draws up battle plans for the looming euro war

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THE PROJECT is dead! Long live the Project! Within hours of the inconclusive election results in Scotland premature obituarists declared Tony Blair's worst fears had been realised: proportional representation does not work, coalitions are a nightmare, New Labour should be allowed to get on with it and rule alone at Westminster.

Yet days later in the grand surroundings of the Foreign Office, Robin Cook and George Robertson stood side by side with Menzies Campbell and his Liberal Democrat colleague from the House of Lords, William Wallace, to present the two parties' joint policy on European defence. "Labour and the Liberal Democrats share a belief that Europe needs to co-operate closely on defence," declared Cook at yesterday's launch. Nodding effusively, Campbell added that: "In the past anti-Europeanism here in Britain has obstructed our ability to co-operate more effectively with our European partners within the Nato structure."

The paper itself is clearer on the principles than how a more integrated defence policy would work in practice. It stresses for example that: "Participating governments must retain their sovereign authority to commit or withhold their national forces," while outlining the need for a "more autonomous European capability". But while the paper is only an opening foray in defence it has a much wider significance.

For Blair's "project" will not be determined by what happens in Scotland. It is the even bigger issue of Europe which will drive it forward. Over time events in Scotland will help to cement it as well. The Lab-Lib Dem partnership will have some bumpy moments on what will otherwise be a smooth ride. Indeed Donald Dewar is as likely to have problems with some of his own MSPs as with his partners from the Lib Dems.

But smooth ride or not, the relations between the two parties in London will remain strong while there is so much business to do over Europe. Blair does not woo the Lib Dems simply because he happened to like Paddy Ashdown and a couple of his colleagues. Nor has he been entirely driven by electoral calculations, although they play a part. The great value of the "project" is that it isolates the Tories over Europe. More specifically, two pro European parties navigating a doubting Britain towards the single currency are better than one.

The remit of the joint Lab-Lib cabinet committee is to be extended further now the defence paper has been published. As Robin Cook put it in his introductory remarks yesterday: "The joint paper we are issuing today is a positive statement of our commitment to work together to get the best deal in Europe. After years of isolation and failure under the Tories, Britain is once again at the forefront of the debate about Europe's future." The years of isolation are ending with two pro-European parties holding hands.

Step by step, Blair is creating his grand pro-European alliance. The Lib-Dems are in position and so, shortly, will be Chris Patten. His appointment as a Commissioner is the best example yet of Blair's capacity to be ruthless for a wider cause. There can be no room for decent but virtually anonymous politicians like Alistair Goodlad, William Hague's choice for the Commission. For Blair the stakes are too high for acts of political generosity.

Patten would have been a formidable ally in a referendum and a thorn in Hague's side if he had been in Westminster rather than viewing events from his loftier perch in Brussels. His new role has more to do with the preliminary skirmishes over Emu rather than the big battle itself. Before Blair can even consider holding a referendum he knows the image of the Commission needs to be hugely improved. The appointment of the charismatic Patten, a politician of renowned integrity, will send out all the right signals. The arrival of Goodlad, who was not good enough for inclusion in Hague's sparkling shadow cabinet, would have conveyed a different message: politicians down on their luck at Westminster can still get a decent job in Brussels.

So Blair, the master strategist, is putting the pieces in place for the grand battle over Europe. Yesterday, he himself gave the strongest hint yet of how he sees his historic role. In his speech in Aachen he spoke of his "bold aim, that Britain resolves once and for all its ambivalence towards Europe", bringing with it an end also to the country's "Europhobia". Although he did not say so specifically, he knows that the ambivalence will end only with Britain's entry to the single currency.

In the space of 24 hours, then, Blair's objective of nudging Britain closer to Europe has moved forward on three fronts. The Lib Dems are signed up in their cabinet committee, not just as a separate minority party echoing support from the sidelines; Chris Patten is on board; Blair mouths warmer pro-European words.

But although Blair appears to hold all the cards, he is playing a game of uncertain duration and outcome. Most immediately the government's relationship with the Liberal Democrats will come under critical scrutiny in the contest to succeed Ashdown. Some of those close to Robin Cook, who in his enthusiasm for the "project" is much the most Blairite minister in the cabinet, are keen that Menzies Campbell becomes the new leader. Campbell's commitment to the "project" is likely to be the main dividing line in the campaign. Yet Charles Kennedy's allies tell me that if he wins there would be no significant change. Certainly Kennedy would be as much a pro-European as any of his colleagues.

What should be a bigger worry for Blair is whether, even with all the pieces in place, a referendum on a single currency is winnable at a time when it makes economic sense for Britain to enter. Indeed Blair has made only one error in his otherwise shrewd approach to Europe, which was to promise a referendum in the first place. Referendums are much easier to promise than they are to hold.

The assumption in Government circles is that a referendum will be called during the honeymoon of the second term. But as David Owen points out in my interview with him in this week's New Statesman, Blair would be obliged to make it clear in the election campaign that such an event was likely. He could not equivocate all the way through the campaign and then credibly hold a referendum very shortly afterwards. But when will Blair dare to send more positive and precise signals about joining the single currency? Certainly in his pro-European speech yesterday he remained as vague as ever on when Britain would join and in what circumstances.

The project will remain in place at least until the referendum. As the referendum may not be winnable for quite a few years, the project has plenty of life in it yet.

Steve Richards is Political Editor of the New Statesman.