An uneasy truce on the euro is broken. There may now be a case for a referendum on the new currency before the election
BRITAIN'S EU presidency ends on Tuesday and Tony Blair will mark it with a visit to Frankfurt. There will be music from a Dutch male voice choir, dancing from an Irish ensemble, a decent lunch, and at 3pm the European Central Bank, which presides over the new single currency, will be officially open.

Rupert Murdoch is not on the guest list.

Last week New Labour's love-in with Mr Murdoch hit a serious bout of turbulence when the Sun's front page shouted that Mr Blair might be "the most dangerous man in Britain". His very plausibility could, so the paper's argument went, allow Mr Blair to talk the British nation into membership of EMU - economic and monetary union.

A repositioning of the Sun was not unexpected. A new editor has been appointed, and the paper's relentless enthusiasm for Mr Blair has made it look flat compared with the more abrasive political slant of the rival Mirror. But the timing and personalisation of the attack took senior ministers aback. The message from Wapping is loud and clear: any further encouragement and support for economic and monetary union from Mr Blair will attract an equal and opposite reaction from the Sun. This issue is probably the biggest confronting the Labour government, and it confronts Mr Blair with an acute dilemma which could cost him the support of his most powerful media backer. To employ one of the Prime Minister's favourite expressions, it is all about tough choices.

Mr Murdoch may not have seen the Sun's front page before it hit the streets last week, but there is little doubt that he was its instigator. He was in town last week, attending Monday's funeral service for Sir David English in St Bride's in Fleet Street, where he was placed next to Mr Blair. Politics was not discussed, and they parted with Mr Blair none the wiser. So what has gone wrong?

One explanation appeared in the Spectator, a day or so later in an article by Irwin Stelzer, Mr Murdoch's close adviser, friend, and fellow Eurosceptic. Stelzer argued the Mr Blair was elected advocating a wait-and-see policy towards the euro, but has changed tack: now the Prime Minister thinks that the euro is "crucial to a US-style long period of economic expansion and full employment", and will propagandise in favour at the referendum. The message was that it is "good politics to go home from the dance with the girl he came in with".

In fact, there has been no formal shift in Britain's policy towards the euro, but the language, tone and thinking have changed. When the currency is launched next January Britain will be one of four countries on the outside. Baring unforeseen circumstances - and this is an important get- out - the Government will not join in this parliament. In any event, a referendum before entry has been promised.

In the minds of New Labour and the Murdoch empire there was an outline understanding. When Mr Blair next goes to the country, the Sun might urge its readers to vote Labour but to vote "no" in a subsequent referendum on the single currency. Yet if Mr Blair abandons relative neutrality and begins to assemble a coalition of business and political leaders behind EMU, the referendum result could be a forgone conclusion.

Britain's presidency of the EU has made it increasingly difficult for Mr Blair to stay on the fence. After the near-fiasco at the May Brussels summit which appointed the central bank governor, Mr Blair took the blame in public. In private the Prime Minister's role in euro preparations has given him a glimpse of the potential gains for himself; in the margins of the EU-Asia summit, for example, he lobbied the Chinese to switch some of their substantial foreign currency reserves into euros next year. With the presidency at an end Mr Blair appreciates that he must sound positive if he is to retain any residual influence over Europe's economic future. That may explain his contribution at the Cardiff summit when he made his warmest noises yet about the euro, portraying it as an engine of American-style economic growth.

AT NEWS International there was alarm that its intentions were being misread. First, Peter Mandelson, the Minister without Portfolio, told a Channel 4 documentary that, if the euro worked, it would ultimately be in Mr Murdoch's business interests to accept a single currency. Then Mr Mandelson's former aide, Derek Draper, wrote an article for the Spectator which contained the straightforward prediction that Mr Murdoch would back EMU. Although it was not so, in Wapping Draper's confident statement was assumed to be a Blair-inspired exercise. The final straw followed Mr Blair's comments at the Cardiff summit - in particular, a unattributed ministerial briefing to the Financial Times stating that the Government had "run up the euro flag and it has not been shot down. So we will probably keep it up there."

Both sides of the argument have taken comfort from the Sun broadside. Sceptics see it as a valuable warning shot which Mr Blair will take to heart. EMU-enthusiast MPs are not so sure. One well-placed backbencher said: "We have had this black cloud hanging over us, and now it's finally rained. My response is that we must move quicker." The logic is that, now the Sun's position is clear, every signal on EMU could provoke a new outburst, so why prolong the agony? In his speech on Tuesday, for example, Mr Blair will try hard to stick to existing policy on EMU, knowing that whatever he says will be seen either as a concession to Brussels or a sop to the Sun.

The economic case for speaking frankly is good. If the Government waits for real economic convergence, Britain could still be out in 2008, if Treasury advisers are to be believed. And the longer it stays out of a successful union, the higher the entry fee will be. Politically, the Prime Minister will be weakened if he is thought to take orders from a tabloid newspaper. For these reasons, pro-Europeans have not given up hope entirely of a referendum before the election - using the get-out clause that circumstances have changed as the pretext. They will be heartened this autumn. The Government plans a public information campaign, including television commercials, to prepare business for EMU at a cost, according to one source, of up to pounds 9m.

ALTHOUGH it would be risky, an early referendum or a declaration of intent is not impossible. In the "big picture" Mr Blair is so fond of, the euro still presents an opportunity to reshape British as well as European politics. If Lord Jenkins's proposals on an alternative voting system for Westminster are accepted in the autumn, a more proportional system could be introduced for the next election. This opens the way for a splinter party of pro-EMU Tories led by Kenneth Clarke, the former Chancellor. Allies believe that, if Mr Clarke thought that the prize were entry into the euro, he might be willing to swallow his objections to PR to try to create a cross-party coalition government able to sustain membership of the euro.

On the Labour back benches Mr Murdoch remains unpopular. When the Competition Bill returns to the Commons in about 10 days, a new amendment will seek to curb his price-cutting. Business managers expect around 50 Labour MPs, including as many as five select committee chairmen, to rebel.

But Labour has hardly broken off relations with News International and on Wednesday evening Mr Mandelson was seen deep in conversation with Mr Yelland at a summer party given by the editor of the Times. None the less, seeds of doubt have been sown. The next 12 months will reveal whether Mr Blair dares to break the mould of British politics and sacrifice his extraordinary relationship with Rupert Murdoch. It is new terrain but, as one minister observed last week: "Anyone who enters a relationship with Murdoch and thinks it's for life is liable to be disappointed. Ask his wife."