Political Commentary: Now the talk is of dumping Major

JOHN SMITH, elected as Labour leader yesterday, will lead his party into the next election. John Major will not. One prominent MP on the Thatcherite right was so convinced of this view last week that he was prepared to bet on it.

You can construct a series of events which fits this prediction, however startling, perfectly well. It goes like this.

Say the Chancellor is unable to get interest rates down before the Conservative Party conference in October. The conference agenda includes a series of critical resolutions on the economy. They are not selected for debate because it is in the nature of these things that the ideal conference motion says: 'We congratulate Minister X on his performance to date and beg him to carry on doing more of the same.' But there are hostile speeches, made the more telling by the menacing association between the level of interest rates and the Government's determination to see through the Maastricht treaty. What more convenient proof of the dangers of being sucked into Europe than the dependence of the British economy on how the Bundesbank manages the cost of reunification? Unemployment in Britain is confidently forecast to exceed three million. Just to cap it all, Baroness Thatcher inspires the critics with a headline-making fringe speech to a packed audience.

Against this fevered background, the Government brings back the Maastricht bill. The Prime Minister makes its successful passage an issue of confidence. The whips try to enforce what one right-wing junior minister complained last week was already a 'police state' in the Tory Party. But the ranks of the Euro-rebels are increased by other MPs, usually more sympathetic to Europe, those who believe the interest rate levels imposed by Britain's membership of the ERM are unacceptable.

Meantime, to satisfy the markets, huge public expenditure cuts - some affecting schools and hospitals - are announced in the Autumn Statement. Labour, revitalised by its new leader, opposes the guillotine on the Maastricht Bill. After weeks of guerilla warfare and all-night filibustering by the rebels, the government business managers finally admit to Mr Major that they cannot get the Bill through the Commons. To the Government's humiliation, the Bill is withdrawn. Mr Major had promised, with the backing of some of his most senior cabinet colleagues, that he would resign rather than see the Bill defeated. He does exactly that.

Are these events likely? We must first assess the conflicting forces in the economic debate within the Tory Party. ERM has produced a number of political ironies. Three weeks ago Stephen Dorrell, the Financial Secretary to the Treasury, made a rather daring speech in which he said two transparently true, but hitherto unsayable things: that the Tories' electoral victory was not 'anything resembling a vote of confidence for our record since 1987' and that it was a great mistake to assume that Labour was unelectable. But the real point of his speech was to turn the backbench criticisms of the Government on their head. A member of the pro-European left of the party, Mr Dorrell was saying, in effect, to the Thatcherites: you have been talking about monetarism for years but we have actually done something about it. We are sticking by ERM. We are the true monetarists now. The right-wing Tories - less perhaps from humanitarian concern than because it helps to make their case - are the ones fretting about the level of unemployment.

The paradox can be overworked. Most of the Thatcherite critics are as opposed to increased public expenditure as they are to ERM and the Maastricht treaty. The new pro-European Tory MP, Stephen Milligan, has said that the wets have become dries and the dries wets. This shows that, as a former national newspaper journalist, he can craft a good phrase. But it is not quite true.

What the critics really want is good, old-fashioned devaluation. They say they want realignment or reduction of interest rates within the ERM or withdrawal from the ERM; they are understandably reluctant to use the D- word with its Wilsonian overtones of an unnatural political practice. But devaluation is what they are after.

Since the election - and this is what has caused the current tensions within the party - Mr Major has disappointed the critics' hopes that he was on their side. Until April it was a more or less open secret in Whitehall that Mr Major was pressing Norman Lamont to lower interest rates faster than the Chancellor wanted. Since then Mr Major has gone out of his way to reinforce Mr Lamont's interest rate policy and to reassert the defeat of inflation as the overriding goal. He has done so, as a number of ministers have noticed, even though he could have left it to the Chancellor and kept his counsel.

One reason is the electoral cycle. For the 15 months after he became leader Mr Major had the voters to worry about; now he can wait until 1996. The cynical political reality - admitted by some ministers - is that the economy does not have to come right until then. But there is also every sign that Mr Major believes in the present policy. He, after all, was the author of Britain's entry into ERM. There are powerful forces locking him in.

The Chancellor's commitment is not in doubt, and it is dangerous work to sack a chancellor, or allow him to resign, because he has been too prudent. Nor are the Chancellor and the Prime Minister isolated in the Cabinet. As President of the Board of Trade, Michael Heseltine, for example, might be especially sensitive to demands for interest rate cuts. There are many things about which Mr Heseltine and Mr Lamont disagree, but this is not one of them. Mr Heseltine shares the belief that only further reduction of inflation will make the economy competitive. He is old enough to remember the 'J- curve' - the seductive argument, used in the 1960s, that, if you devalued, export prices would fall with a bad effect on the economy at first but then the volume of exports would increase as a result, precipitating a recovery. Mr Heseltine would argue that previous devaluations led to inflation, not recovery. Mr Heseltine has also reminded his colleagues that exports, even at the present exchange rate, are actually increasing.

In other words, the rebels - and Mr Major, in the unlikely event that he chose to concede to them - would be taking on much of the Cabinet.

This is not to say that the going will be easy for the Government. One senior minister remarked last week that he was sure it would come through a difficult autumn and winter but he was not yet sure quite how. The Government is confronting the hollowness of its own myth during the election: that world factors had caused the recession but a Tory victory would end it.

The Cabinet looks determined. The Maastricht bill is still likely to be the main lightning conductor for discontent. The Government is banking on ferocious whipping and the hope of growing impatience in the mainstream of the party at the tactics of the Euro- rebels. Moreover the rebels are strangely leaderless; Lady Thatcher might have had that role had she listened to the pleas of her disciples and stayed in the Commons. The publication of Nigel Lawson's memoirs may damage her credibility further before the Tory conference. It will be touch and go but the balance of Tory forces remains with Mr Major.