THE BUDGET: Sceptic spectres spoil Clarke's giveaway feast

Tory right-wingers are out to `get' the Chancellor, writes Stephen Castle

The host was the German ambassador, and the glittering diplomatic reception last Monday was to bid farewell to Ludger Eling, the leading light of a German think-tank in London. But the guest of honour (who presented Herr Eling with a silver salver) was very British: the fiercely pro-European Chancellor Kenneth Clarke. Mr Clarke was in an ebullient mood, as he was the following day at a dinner in the Commons with Conservative MPs. "How" the Chancellor was heard to ask, "can we possibly lose an election with an economy looking so good?"

The next morning the answer emerged loud and clear from a normally obscure standing committee scrutinising European legislation. Right-wing Tories staged a dramatic coup disrupting the committee and mobilising enough support to ensure that a hefty bundle of Euro-documentation was denied formal approval. The Eurosceptics have returned with a vengeance, bringing with them the spectre of internal party divisions on Europe potentially fatal to the Government's already slim electoral prospects.

The Chancellor is now centre stage as the fate of John Major's rickety government is played out. This week he will present a Budget expected to produce tax cuts designed to provide a springboard to the Tories' election campaign. Yet a sizeable proportion of Conservative backbenchers seem more interested in grilling the Chancellor publicly over his attitude to the single European currency. There is talk of government defeat, even a confidence motion if a compromise cannot be agreed between Mr Major and backbenchers clamouring for a formal debate on European Monetary Union (EMU) in the Commons.

The passions involved are reminiscent of the great days of Maastricht; one sceptic MP said last week: "This is a once in a lifetime situation. What's the point of being here if you can't affect issues like this?" A Major loyalist retorted: "The right are bananas. They ought to be dealt with by South American dictators using traditional methods."

For a time, earlier this year, it looked as if the Tories might hold their informal truce over a single currency. But pro-Europeans feared a further push by the sceptics to pressure Mr Major to rule out entry, at least in the first wave. So they struck first, with the intervention of the so-called "grandees", who wrote to the Independent in the autumn defending the government's insistence on keeping options open. The idea was to give support to Mr Clarke who, at times, appeared to be holding the pro-European banner almost alone. The Eurosceptics, who blamed the left for breaking the truce, have been organising with the "92 Group" of right-wing MPs trying to persuade prospective parliamentary candidates to sign up against EMU in their own election addresses.

Then Labour raised the temperature last weekend by announcing its own Euro-referendum, removing "clear blue water" between the two parties. In the meantime sceptics were poring over a mound of documents relating to the single currency. The select committee on European legislation had called for them to be debated on the floor of the Commons. Instead ministers sent them to European Standing Committee B.

The rebellion mushroomed, involving leading sceptics like John Redwood, David Heathcoat-Amory and Bill Cash but also some on the centre and left of the party. As one right-winger put it: "The most important thing to remember about MPs is that they are pompous and self-important. They do not like being treated as lobby fodder."

On the government side there was a determination not to give in largely because, if a substantive motion is allowed, there is a real prospect of defeat. With the Ulster Unionists disgruntled over the BSE crisis, it would take just one sceptic to change sides to bring about a humiliation. Such is the record of some of the Maastricht rebels that the government might not be able to rely on them even in a confidence motion. Instead Mr Major (who is to meet the chairman of the backbench 1922 committee this week) has insisted a debate on Europe before the Dublin summit on 13-14 December will allow enough scrutiny.

The right do not accept this. Their target is Kenneth Clarke. As one put it last week: "The reason for all this is that we wanted Clarke for a full debate on the floor of the House. They offered us [Phillip] Oppenheim [junior Treasury minister] for a couple of hours upstairs in committee."

Mr Clarke is correctly seen as the last Cabinet impediment to a much more sceptical line on Europe. Sceptics scent an opportunity to tie his hands before EU finance ministers meet in Dublin. The right's attack on the Chancellor, for so long its bogey, has now focused on the single currency.

A year ago Conservative Way Forward, the Thatcherite pressure group, was arguing for big tax cuts. This year few on the more cerebral right are expecting more than a two pence income tax cut, and - with mounting evidence of inflationary pressure building in the economy - many would settle for a penny with a widening of the 20p lower band.Even Mr Redwood is cautious about calling for tax cuts which might result in higher interest rates before the general election.

But in a week which should have been filled by speculation about the Budget, the Government now has the worst of all worlds. It has yet to defuse a rebellion which might lead to a dangerous Commons defeat. It has also reminded the voters of its deep divisions, just as Mr Clarke hoped to focus on the one thing that could revive the party's prospects: in Bill Clinton's phrase, "the economy, stupid".