As Germany compounded Mr Blair's problems by stepping up demands for a common EU tax policy, Lord Jenkins criticised the Government for "standing on the sidelines" this week as 11 countries launched the euro, and saying "we will join later if it works".
Writing in The Independent today, Lord Jenkins likened this stance to countries such as Romania and Bulgaria "who in the two world wars have waited to see which side was winning before deciding with whom to ally themselves".
The former Chancellor and European Commission president said Mr Blair's huge Commons majority should give him the "courage" to take the European issue head-on.
He described Mr Blair's failure to call a single currency referendum last summer a "missed opportunity" and insisted the Prime Minister would have won a substantial "yes" vote, enabling Britain to join the euro this week.
Instead, 20 months into the life of the most popular government in recent history, "practically no advance has been made towards creating the positive majority". He added: "We always join in the end, but at the wrong time and on worse terms."
Lord Jenkins dismissed as "pathetic" attempts by Eurosceptics to turn the pound "into a national virility symbol" when it had fallen from a value of 12 to less than three Deutschmarks in 40 years.
His criticism will surprise Mr Blair, who regards the Liberal Democrat peer as a mentor. It came as Germany marked its first day in the EU's rotating presidency by warning that Britain's ability to decide its own levels of company taxes could be reduced.
Gunter Verheugen, the German Minister for Europe, insisted the aim was not single tax rates, but said "target zones" could be set for corporation tax. As with VAT, the EU would fix bottom and top limits on what member states could levy, in a move which would put pressure on Britain to raise its relatively low rates.
Mr Verheugen told BBC Radio 4's Today programme that harmonisation could also mean the end of the Channel Islands' status as a tax haven. Other potential areas for co- ordination included consumer and energy taxes.
John Redwood, the Tory trade and industry spokesman, said: "The German minister has clearly stated that this single currency scheme is part of a much bigger package to bring about a federal Europe."
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