Clarke, a large man in a tight spot

The Chancellor faces a tricky future after the triumph of `Sterling Tories' in the referendum battle

From the outside, the Cabinet argument about a single currency plebiscite has seemed a little loopy. Any such referendum is far off and, under the Tories, most unlikely. For Kenneth Clarke to get so irate now about something that probably won't happen in 2001 has laid him open to the charge of belligerence beyond reason. Yet he was right to fight, and it matters to Britain that he lost.

For despite the outbreak of determined grinning all round, that's what has happened. In the end, Kenneth Clarke blinked and John Major won. As I reported here last month, the Chancellor had, emotionally as well as intellectually, been prepared to resign in order to halt the anti-Brussels ratchet. Yet the so-called concessions he has won are not important - cosmetic face-savers, not substance. They emphasise his weakness, not his strength.

Take the Prime Minister's promise that collective responsibility would be imposed on Tory ministers during a single currency referendum. Euro- sceptics don't take this seriously and they are right not to. So many Conservatives are utterly opposed to giving up the pound that imposing collective responsibility would destroy by resignation any Tory administration remotely similar to this one.

So collective responsibility means two things. First (and this is a plus for Clarke), such a referendum won't happen under today's Tory party. But second (and this matters more) it only won't happen because the Tories will not take Britain into a single currency. They cannot.

This may have been the underlying reality before but the referendum episode has made it explicit. Tony Blair's jibe about the Chancellor's "paralysis" in the Commons on Tuesday (Clarke could neither nod assent nor shake his head when challenged) is a fair description of the Conservatives' remaining room for manoeuvre on the matter.

As the Chancellor realised long ago, this effectively means that, for the time being, the anti-single currency Tories have won. Since it requires political movement to achieve a new currency, and since the Conservatives cannot move, the pound is safe with them. (Indeed, now that the single currency has been named the euro, we can rename the factions, and declare that the Sterling Tories have beaten the Euro Tories.)

This is unlikely to be a mere holding position, up for revision if the Tories win the election, as Clarke's supporters would like to think. So long as this Conservative Party remains in power, the Maastricht single currency opt-out has become a single currency lock-out. Major's promise to leave the issue "open" during a future putative Tory parliament looks empty unless one first hurdles two unlikely thoughts - that the Tories will win; and that they will then change radically over Europe.

Similarly, though Major has clearly told Clarke that he will concede no more to the anti-Brussels MPs, and promised that the tone of the election campaign won't be nationalistic, these are not bankable promises, either in Threadneedle Street or Frankfurt. Despite the flattery and the personal attention at which the Prime Minister is so good, Clarke has lost and knows it perfectly well.

So what was he up to? Had he simply overplayed his hand? To understand the excruciatingly difficult choice facing the Chancellor we must look beyond the personality politics to strategy. For had Clarke resigned now, he would have become the unquestioned leader of Tory Euros, and perhaps stopped the Euro- sceptic tide, but at a terrible price.

Remember first that there is a great swathe of Conservative and business opinion which, when the time comes, will be keen for Britain to join. This ranges from quite a lot of the City (though the argument there is tilting against at the moment), to Tory MEPs, plus a vocal minority of the parliamentarians and, not least, the manufacturers and exporters of middle England, the Midlands engineering and services companies that are strongly represented in Clarke's actual and symbolic constituency.

Faced with the choice of a "Sterling Tory" government, utterly opposed to joining the euro or a moderate, pro-European, new Labour one that has left the option genuinely open, some of the above would be torn in their allegiance. But if the Tory party splits, they will form a distinctive and important movement in British political life. And its obvious leader is Kenneth Harry Clarke.

His position is uncannily similar to that of Roy Jenkins in the Seventies - another ruddy-faced, rather portly pro-European Chancellor who was much tipped as a future leader but who found the party veering away from him. Jenkins, of course, eventually formed a moderate breakaway party thatdestroyed any hope his old party had of winning power for a decade - something triumphalist Sterling Tories would do well to remember.

If Clarke has thought about breaking out of the Treasury and launching himself on a similar odyssey, and hesitated, we can hardly blame him. For the drawback, and the dissimilarity with Jenkins, is that in resigning, Clarke might bring down the Government. Doing so would tear away Major's chance of a year of political recovery and drive the Tories into what would be, almost certainly, an electoral slaughter.

Conservatives, even Euro Conservatives, would not be happy about that. They might conclude that Clarke had had no other choice, and was right to make a stand. But then again, they might just be bloody furious. The defeated party might then come to its senses. But it seems an implausible thought. So going or staying has been about much more than Clarke's personal relations with Major. It is about the future of the Conservatives.

Labour, having muffed its chance to trump the Tories by offering a referendum first, will be encouraged to emphasise the difference between the parties on Europe. Now that the Conservatives have, in practice, abandoned any possibility of joining the euro for many years ahead, Blair can attempt to rally business and manufacturing support for a "keep your options open" manifesto. A pro- business Europeanism is, like law and order, the kind of cross-over politics that the Labour leader delights in.

Certainly, this week's defeat of Clarke creates a wider gap between the parties on Europe. Getting the referendum issue out of the way will help the Conservatives to concentrate their fire on Labour's own divisions, and on Blair's alleged federalist tendencies. Bold, simple messages about surrendering the veto and selling out to Brussels make Tory Central Office rub its corporate hands with relish. And in the end, this will count more in Major's campaigner's mind than any promises he may have given over the past couple of days to Clarke.

As for the Chancellor, he has a tricky time ahead. He is on the record as being hostile to the referendum he is now signed up to, and also in favour of Britain joining the euro. Now he has to try to convince his supporters that this might yet happen under the Majorite Tory party, when it has become perfectly obvious that it won't. Ken Clarke remains a big man. But after weeks of bullishly, joyously throwing his weight about, he has discovered the limits of his influence. Behind yesterday's broad and mirthless smiles, that must hurt. It must be like an intimation of political mortality.