Spin, plots and denials: how Brown lost out in euro battle

On Wednesday evening, Tony Blair's closest advisers were furious to learn that the BBC's 10pm television and radio bulletins were going to lead on a story saying that the Prime Minister had accepted the verdict of the Chancellor, Gordon Brown, that the economic tests for joining the euro had not been passed.

For several weeks, Mr Blair and Mr Brown have been locked in intense discussions on a 2,000-word assessment drawn up by the Treasury. But no agreement had been reached on how to present it and, crucially, on what to say the Government would do next.

Andrew Marr, the BBC's political editor, is one of the most respected journalists at Westminster. But No 10 issued an unusually strong denial of his report, saying: "Very few people know what is going on. Andrew Marr is not one of them."

At one level, there was very little new material in the BBC report. On 9 April, The Independent disclosed that the Chancellor had submitted a lengthy, negative report to the Prime Minister on his euro assessment and proposed that a referendum be ruled out until after the next general election. Mr Blair wants to keep the option open. The press repeatedly predicted that Mr Brown would deliver a "not yet" verdict on his much-vaunted five tests for joining the euro.

Some Blair allies suspected that the Treasury was the source of the BBC report – a charge strongly denied by Mr Brown's department. "Downing Street went ballistic," one minister said yesterday. "It suspected that the Treasury was up to funny business."

Whatever the provenance of the story, the timing was explosive. Far from reaching agreement, Mr Blair and Mr Brown had failed to settle the Government's future strategy on the euro, even after a session at Chequers running to several hours – and whisky. In recent days, Downing Street has been trying to cool what one insider called "runaway speculation", and so viewed the BBC story as a hostile act.

According to the Blair camp, the Chancellor had already tried to "bounce" the Prime Minister into endorsing his euro strategy on the eve of his Budget last month, when he proposed announcing a decision as part of his Budget statement. In the event, the two men agreed it would not be right to "bury" such a momentous decision during the Iraq war.

Some Blairites saw Wednesday's BBC report as another attempted bounce by the Treasury. They claim that the Prime Minister decided to turn the tables on his Chancellor by handing control of the euro decision to the full Cabinet. One cabinet minister said: "The BBC report certainly acted as a catalyst. No 10 realised that we couldn't carry on with all this endless speculation."

John Prescott, the Deputy Prime Minister, has led demands by ministers for the full Cabinet to decide the Government's future policy and argued that it should not be presented with a fait accompli – as would almost certainly have happened if Mr Brown had announced it in his Budget.

Before yesterday's weekly meeting of the Cabinet, Mr Prescott and Mr Brown held talks with Mr Blair, who proposed an extensive and unprecedented series of cabinet discussions before Mr Brown finally announces the Government's decision on 9 June. Crucially, a minority of cabinet ministers share Mr Brown's cautious approach to the single currency, while a majority of more than two to one share Mr Blair's more positive instincts.

The Brown camp insists that the Chancellor was happy to go along with this process and, indeed, proposed it when the full Cabinet gathered at 10am. One cabinet member said: "There was a good atmosphere; Gordon was all smiles." His aides recalled that when Mr Brown announced the Government's euro policy in 1997, he said the economic assessment would be made by the Treasury but the decision taken by the Cabinet.

"The idea that the decision to involve the Cabinet was imposed on the Treasury by No 10 is just plain wrong," one Brown ally insisted last night. The Chancellor's camp argues that his position on the euro has been deliberately "painted black" by pro-euro enthusiasts. It argues that the differences between Mr Brown and Mr Blair are much smaller than portrayed in the media.

There are two interpretations of yesterday's decision to wrest the Government's final decision out of the Treasury's hands. On one version, the cabinet consultation is little more than a fig leaf designed to rebut the charge – made so spectacularly by the former secretary of international development Clare Short in her resignation statement on Monday – that Mr Blair runs a presidential system and overrides his ministers.

According to this account, Mr Brown's "not yet" verdict cannot be altered by the cabinet discussion. Even if ministers keep open the option of a referendum in this parliament, there is little prospect of one happening because Mr Blair could not win it. Public opinion remains hostile and it would be almost impossible to turn it round without the 100 per cent support of the Chancellor. A negative Treasury assessment would hardly be the perfect start to a referendum campaign.

But there is another scenario. Some cabinet ministers are convinced that the tectonic plates under the Government shifted yesterday and that things will never be quite the same again. They believe that the Cabinet can turn Mr Brown's "not yet" into "yes, but" and set out a road-map for joining the euro involving a further assessment and, possibly, a referendum next year or in 2005. So Mr Blair may achieve the "place in history" that Ms Short alleged was increasingly his obsession.

Yesterday could prove a pivotal moment for the Blair-Brown duopoly, which has run the Labour Party for nine years and the Government for six. One Blair ally said: "This is the first time that Tony has really taken on Gordon on an issue of such magnitude." But some ministers believe Mr Blair will back away from confrontation with Mr Brown when the crunch comes. We should find out who is right on 9 June.