The Week in Politics: Blair's success on defence pact masks failure over the euro

Tony Blair could afford a self-satisfied smile as the European Union summit got underway in Brussels yesterday. At a breakfast meeting with Jacques Chirac and Gerhard Schröder, the three leaders celebrated a deal on EU defence co-operation, brokered by Mr Blair, who squared the scheme with a reluctant Mr Bush.

The Prime Minister could also take comfort from the fact that, for once, Britain was not cast in the role of the party-pooper: the bad guys this time looked certain to be Germany and Poland, locked in a dispute over their respective voting power in the EU.

It is true that Mr Blair could point to the defence pact as a sign that his strategy of "positive engagement" in Europe is paying dividends for Britain as well. He sees the choice as: standing on the sidelines while others move ahead, or getting involved and helping to shape the new Europe. On defence at least, the strategy worked.

And yet a closer look at Mr Blair's record on Europe since 1997 shows he has made little or no progress on the central element in the EU project - the single currency. Although Britain does "punch above its weight", it remains on the sidelines on the most important aspect of EU integration.

Much has been written about the "deal" between Mr Blair and Gordon Brown over whether the Prime Minister would step down during a second Labour term and hand over to the Chancellor.

What was not disclosed is that Mr Blair thought he had a deal with Mr Brown on the euro: he agreed to delay a referendum in Labour's first term in return for an understanding that both men would "go for it" if Labour won a second.

Blair the "Optimist" has retained faith in his ability to "win Gordon round" on the single currency. But his confidence was misplaced. The Prime Minister struggled to put a thin gloss on Mr Brown's downbeat statement in June saying that Britain had passed only one of its five tests for euro entry. Mr Blair's hopes in June that he could still call a referendum before the general election were soon extinguished, and the rightly-mocked "roadshows" to win public support for the euro never even started. There is another reason why Mr Blair's European policy has failed. While Europhiles carp at the Prime Minister's refusal to "give a lead", the truth is that he has been boxed in by the two most important cabinet ministers on EU issues - Mr Brown and Jack Straw. When Mr Blair shocked Robin Cook by ousting him from the Foreign Office in 2001, he wanted Mr Straw to form an alliance with Mr Brown for euro entry. He judged that Mr Cook and Mr Brown, who had had a long-running personal feud, could not work well together. As a self-styled "practical European", Mr Straw's conversion to the euro, as well as the sceptical Mr Brown, would be the trump cards in a referendum campaign.

Instead, the Foreign Secretary and Chancellor formed a very different alliance - one aimed at keeping Mr Blair's euro hopes in check. They have won, much to Mr Blair's frustration. Indeed, some close Blair allies suggest that the Prime Minister now regrets sending Mr Straw to the Foreign Office rather than the Department of Transport (where he thought he was heading).

There are mutterings in Downing Street that Mr Straw's main priority is his "daily phone call to Colin Powell" in Washington and he has devoted less time to building alliances in Europe - at which Mr Cook excelled.

The frustration boiled over when Mr Straw said in the run-up to the Brussels summit that "life will go on" in the EU if no agreement is reached on a new constitution. That conflicted with Mr Blair's view that streamlining the EU's cumbersome procedures is vital as it prepares to expand from 15 to 25 members next spring.

As Mr Blair struggles to persuade the British people to end their half-hearted approach to the EU, he feels that the Straw-Brown approach smacks too much of Margaret Thatcher's "them and us" attitude. However, Mr Blair cannot entirely blame his European problems on his two cabinet colleagues. He undoubtedly compounded those problems by taking such a pro-American stance on Iraq. Time is a healer, but the wounds caused in Europe have not fully healed.

Mr Blair knows that Britain will not resolve its "half in, half out" attitude to Europe until it joins the euro. He is the most pro-European Prime Minister since Sir Edward Heath, who took Britain into the EU in 1973, and yet he has achieved very little for the history books.

On the face of it, Mr Brown has done little to build the "pro-European consensus", as he promised to do in June. Not true, say his aides, pointing to the new way of measuring inflation and reforms to the housing market highlighted in Wednesday's pre-Budget report.

They insist the Chancellor does want to build a consensus for the euro, and constrast his painstaking approach to Mr Blair's rushed announcement of policies such as foundation hospitals and university top-up fees.

Although Mr Blair and Mr Brown seem far apart on Europe, they may yet come together. The rapprochement between them in recent weeks has fuelled speculation that they have struck a new deal under which the Prime Minister would stand down after a third term euro referendum.

"Something big has changed between them - but no one else knows why," one insider said yesterday. If such a deal really has been reached, perhaps it will be third time lucky.