Brown demands EU reform as euro pressure mounts

Gordon Brown, the Chancellor, will warn his European Union colleagues today that a radical increase in competition and economic reform is the best way to help the "pro- European" cause in Britain.

Gordon Brown, the Chancellor, will warn his European Union colleagues today that a radical increase in competition and economic reform is the best way to help the "pro- European" cause in Britain.

Mr Brown will seek to shrug off divisions over the euro within the Cabinet by underlining his own European credentials at a meeting of finance ministers in Brussels.

Downing Street revealed yesterday that Tony Blair and Mr Brown were locked in "intensive discussions" over the coming announcement on the five tests for Britain's entry to the single currency.

The Tories claimed the Government was "split from top to bottom" over the issue, with "ferocious faction fighting" underlined by recent statements from ministers.

Both Helen Liddell, the Scottish Secretary, and Peter Mandelson, the former cabinet minister, reiterated their strong advocacy of the euro. Ms Liddell said that a "sixth test" should be "the opportunity cost of not going in".

In a move to reassure the pro-euro camp, Mr Brown pointed out at the weekend that he had no intention of making European economic reform a sixth test for British membership. However, the Chancellor will today emphasise the importance of such reform as finance ministers from the 10 new member states meet for the first time.

Mr Brown will seek the support from the largely former Communist states as he argues the need for much more flexibility in European economies to compete with the US.

He will give his enthusiastic backing to the European Commission's new plans to improve the EU single market and remove existing obstacles to free trade in services across the continent.

"Pro-Europeans need to unite around the agenda for reform," a Treasury source said. "This is not about 'old Europe' and 'new Europe' because France and Germany are with us on much of the reform agenda, but we see a lot of the new countries as allies and that will affect the balance on the European Council."

As the 7 June deadline for an announcement on the five tests approaches, the Prime Minister's official spokesman stressed yesterday that the Cabinet would be involved in the decision on when to hold a referendum. "There would clearly be a discussion at Cabinet before a final decision is taken and then, obviously, an announcement made in pretty short order after that. In terms of precisely when that will be, I can't tell you. I don't think it is settled yet," he said.

In a speech to business leaders in Edinburgh, Mrs Liddell warned that Scotland would be left "out on a limb" if the UK failed to join the euro. Pointing out that Mr Brown's assessment did not include the cost of staying out, she said: "We risk turning away from the biggest economic decision of our lifetime based on incomplete knowledge."

Mrs Liddell quoted the Prime Minister's view that Britain was best at its "boldest" and denied that joining the single currency was "some kind of leap in the dark".

In a further jibe at the Treasury's five tests, Mr Mandelson said that "no amount of words, studies, surveys and assessments" could disguise the fact that overseas investment would be hit by staying out of the single currency.

Charles Kennedy, the Liberal Democrat leader, also warned that delays on the single currency were costing homeowners £50 a month in cheaper mortgages. "If the Prime Minister and the Chancellor duck the issue of a referendum yet again ... we will have lost the chance to rebuild British credibility in Europe," he said.

Michael Howard, the shadow Chancellor, said the Cabinet row proved that Mr Blair was a weak leader. "The Government is split from top to bottom on this issue, just as it was over Iraq and just as it is on foundation hospitals," he told the BBC Radio 4 Today programme.

Leading businessmen tried to step up the pressure on Mr Blair not to rule out a referendum before the next election. An open letter containing the plea was signed by 25 business leaders and heads of multinationals including Sir Chris Gent, the chief executive of Vodafone, Peter Sutherland, the chairman of BP, and Lord Simon of Highbury, the former Treasury minister. Senior executives from Ford, Boeing and Siemens also signed.