Andrew Grice: Is Nick Clegg's brand so bust he can't remain leader?

His friends blame the "Continuity SDP" for the emergence of a debate on leadership

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The elephant in the Liberal Democrat room is suddenly being talked about: should Nick Clegg lead his party into the next general election? When I told the Deputy Prime Minister a year ago that such a debate was inevitable, he scoffed. But then he hardly has an interest in encouraging one. We are not quite yet halfway through this five-year parliament, so Clegg allies wonder how it serves the Liberal Democrats' interest to raise the leadership issue now.

But with the economy, the Liberal Democrats' and Mr Clegg's own ratings all flatlining, the debate has begun earlier than he expected.

His friends blame those they call "the Continuity SDP", a band of Labour brothers who defected to the Social Democratic Party before it merged with the Liberals.

The figurehead is Vince Cable, the Business Secretary, whose close ally Lord Oakeshott said on Thursday the Liberal Democrats should consider a change of management like any company which had lost half its market share.

The anti-Clegg brigade hope for a "shareholders' revolt" by Liberal Democrat members worried that the party faces a wipeout in 2015 if it remains locked into a failing Conservative economic strategy.

However, Team Clegg expects the vast majority of activists at this month's party conference to remain loyal. It believes the critics want the Liberal Democrats to be "Labour's little helpers" – impossible while the party is in coalition with the Tories.

All the same, Mr Clegg accepts that he must do more than repeat his familiar "hold your nerve" mantra to his party and tell it to wait for the economic tide to turn. The absence of growth is a much bigger headache for the Liberal Democrats than the other main parties. At the 2015 election, the Tories can ask voters to let them "finish the job" of clearing the deficit. Labour can argue that the cuts imposed by the "nasty party" and their furry Liberal Democrat friends have killed growth. But Mr Clegg's party will struggle to cash in the economic dividend it hoped to earn by taking tough decisions in government.

George Osborne's plan for more cuts in 2015-17 is a quagmire for the Liberal Democrats. The Chancellor, with one eye on the opinion polls, seems happy for the welfare budget to take another big hit and has pencilled in another £10bn of savings. Mr Clegg will swallow some more welfare cuts but believes it would be wrong to balance the nation's books on the backs of the most vulnerable. He also knows that his own party would rebel over another round of swingeing benefit cuts.

This explains why Mr Clegg proposed a temporary wealth tax to ensure the richest take some of the strain this week. Although he will need to put flesh on the very bare bones, it was a win-win argument. If the Tories accept it – and the Liberal Democrats' proposed mansion tax on homes worth more than £2m is still in play – Mr Clegg will claim the credit. If they reject it, then he has at least shown the public his party is different to the Tories and on the side of the angels.

That, however, may not be enough. His biggest challenge is to show the Liberal Democrats are making a real difference inside the Coalition.

"His problem is that he gets lots of little things; he needs to show the public one or two big things," says one Tory cabinet minister.

"Differentiation" will only get the Liberal Democrats so far.

A Coalition dominated by rows and tit-for-tat politics is not in the interests of a third party that cannot win power alone.

The next few weeks will be a bumpy ride for both Coalition parties. First, a "proalition" phase will involve a Cabinet reshuffle and a much-needed growth package with measures to boost house building.

Then the Tories and Liberal Democrats will diverge for their autumn conferences, when they will inevitably try to water their own grassroots. After that, there will be another "proalition" moment when they publish a mid-term review – not a Coalition Agreement Mark II but a progress report on the goals set in 2010 and list of unfinished business.

Speculation about his own position was not part of Mr Clegg's script. But it is on the agenda now. He needs to reassure internal critics worried he has given up hope of wooing back left-of-centre voters who have not forgiven him for hopping into bed with the Tories. Some never will.

But to avoid a rout in 2015, the Liberal Democrats need to persuade other progressives to hold their nose and back the third party in Tory-Liberal Democrat marginals.

At some point before then, Mr Clegg may have to ask himself whether his personal brand is so bust that it would be his duty to his party to stand down as leader, perhaps carrying on as deputy PM until the election.

Whatever his faults, he is not a coward and his strong instinct is to fight the next election as leader.

The party's prime duty, he believes, is to show that coalition works; his walking away would not be a good advert. It would make it more likely that this Coalition is a one-off, merely a brief interruption of the pendulum politics enjoyed by the Tories and Labour.

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