A Chancellor at the end of his tether

The Euro-referendum row is causing friction between Major and Clarke - and it could prove fatal

In the Commons chamber yesterday, John Major was jokey as he was tested by the Opposition about a referendum on the single European currency. But behind the public smiles, one of the worst cabinet rows of the Major years is brewing; it could yet lead to the resignation of the Chancellor, Kenneth Clarke, and even to the fall of the Government itself.

For weeks now there have been strong hints from Number 10, Conservative Central Office and the Foreign Office that the Government was about to commit itself to a referendum. Opinion in the party, strongly fanned by the Tory press, has been driving in that direction with seemingly unstoppable force. Sir James Goldsmith's threats, though directed towards a wider referendum, have accelerated the process and terrified some Tory backbenchers.

Malcolm Rifkind has been asked to produce a decision to be announced at the Conservative Central Council meeting at the end of the month. Ministers, officials and backbench MPs have given the impression that the decision is all but taken, and that it will be firmly to promise a referendum should the Cabinet ever propose to replace the pound by the euro.

The main obstacle has been the substantial figure of Kenneth Clarke, whose opposition to a referendum has been expressed strongly, often and clearly. But other ministers have convinced themselves that "Clarkie'' was coming round.

They are wrong. It is wishful thinking. If the Cabinet votes for a referendum on the single currency, then I think Clarke will resign. He is a man with a short tether, and has reached the end of it. As he prepares to head off for a 10-day visit to Africa, he is in a very tough mood indeed. Admirers and colleagues who have tried to persuade him not to make a stand on the issue have been firmly rebuffed.

The background is a familiar one: tension between Numbers 10 and 11. Major knew that a referendum announcement would delight his increasingly Euro-sceptical party. He may also have convinced himself that, on such a momentous issue, it was the democratic thing to do.

At any rate, though, he was once firmly against the idea, this smooth master of maneouvre and management has moved with the mood of the party. Other ministers followed suit.

But not the Chancellor. As recently as 4 March, he thwacked the anti- monetary union, pro-referendum Tories both morning and evening. In a Daily Telegraph interview, he said he was sympathetic to the idea of a single currency. And later, he told the Commons that Major "has made it extremely clear that if and when we ever face the choice of whether to join a single currency, a referendum is one of the things that could be considered at the time". In fact, of course, Major had decided almost the opposite: that it should be faced right now.

Why was the Chancellor being so belligerent? To some, that's a bit like asking why rhinos charge; it's in the nature of the beast. But there is another reason. Major's increasing frustration at his Chancellor's refusal to budge had been followed by quiet, insistent and menacing anti-Clarke briefings from mainstream MPs in the Commons lobbies. Authorised or not, this must have rankled. Meanwhile, Major's enthusiasm for a Chris Patten succession was interpreted by Clarke people as a deliberate snub to the Chancellor.

Like William Waldegrave, Clarke's number two at the Treasury, Patten and Major are members of a genteel Tory Broederbond. To Clarke, the message may have come back: "Don't think you are indispensable to the Tory centre- left. There are other contenders, you know." Clarke is a proud man. He doesn't respond well to threats.

Yet it has been assumed that he wouldn't go, in the end, for three reasons. First, he would want to take credit for a strengthening economy in the run-up to the election. Second, he knows that his resignation would delight his right-wing enemies. Third, as a Tory loyalist, he would fear that by going he would bring the Government down.

Such thoughts may yet change his mind during the crucial few days at the end of March when this issue will probably be decided. But he isn't budging yet; indeed, he seems to be mentally preparing himself for resignation. Speculation about Clarke's departure is already strong enough in Whitehall for gossip about his replacement to have started. Both Peter Lilley and Ian Lang have been mentioned. In the reshuffle that would be triggered, some even think that John Redwood would be invited back; though he probably wouldn't welcome the offer.

No doubt, at some level, this is a game of dare. Major is daring Clarke to go, and gambling that in the end, he won't. Clarke is daring Major to try him. On past evidence, one would expect the Prime Minister, working with Rifkind, to produce a fudged verdict on the referendum as a way of keeping the Chancellor sweet. But that would send the right into orbit and the cabinet arithmetic is so strongly stacked against Clarke that Major may call his bluff. After all, Major may think, Norman Lamont thought he was indispensable, too.

But the other recent precedent is of course the Margaret Thatcher-Nigel Lawson row, which eventually pushed her off her perch. There is no direct or necessary connection between a Clarke resignation and the fall of John Major. But there are still strong pro-Europeans on the Tory benches who see Clarke as their last reliable defender at the top of this government. They would be aghast at his going, and unpredictable thereafter.

Some of them are personal and partisan supporters of Clarke. Others simply agree with him about Europe and about the referendum: at yesterday's question time, Sir Terence Higgins, one of the most respected of the older Tory MPs and former chairman of the Treasury select committee, asked John Major a pointed, detailed and hostile question about the expected referendum flip. The Prime Minister is too shrewd a politician and too natural a whip not to have read between those lines.

Nor should we ever forget that Major is the great escapologist of modern politics. But as he sat murmuring to Clarke on the Government bench during yesterday's European statement, seemingly languid, he must surely have been thinking that this is a dangerous game. And so it is. Major seems determined to promise his referendum. Clarke seems determined to go if he does. Of course, one of them may blink. If not? Well, that is how governments die.