Steve Richards: The euro referendum will finally cure the Tories of their madness

At the last election Tony Blair and his entourage were often in an exasperated fury. The media and voters were stubbornly indifferent to what they considered to be a defining moment. "You don't get it," they would occasionally scream, "the election is an historic referendum on a right- wing Conservative Party. If we win a second landslide we would kill off right-wing Conservatism for good."

Later today the new right-wing Conservative leader will be heading to Blackpool for his party conference. He will be joined by the most right-wing Shadow Cabinet in the party's history. William Hague is dead! Long live Iain Duncan Smith, Michael Howard (brought back from the dead), Bill Cash (brought into life on the front bench for the first time). Far from killing off a Thatcherite Conservative Party, Labour's landslide win has resulted in a front bench that makes Baroness Thatcher's teams seem dangerously left-wing.

In the meantime those sensible Tories that senior Blairites assumed would flourish after a second humiliating defeat for their party are nowhere to be seen. Before the planes hit Washington and New York, Kenneth Clarke had announced he would not attend this week's conference. At about the same time senior Portillistas decided they needed a holiday, and booked one to coincide with the party conference. Blackpool was not on their list of potential locations.

The situation in the Conservative Party is so dire that even those who are worried about its direction cannot be bothered to turn up for a row. What a contrast to Labour in the 1980s when passions were so roused that delegates would have travelled to Kabul for a party conference. Charismatic Conservatives, worried by Mr Duncan Smith, have gone bird-watching. The stage of the Winter Gardens in Blackpool will be left to Mr Duncan Smith and his merry band.

What has gone wrong with the seemingly flawless theory that the humiliating defeat of Mr Hague's Conservative Party would cause a rethink on the right? The prevailing view in Labour circles and in much of the media is that the Conservatives have gone mad. They were stark-raving bonkers to elect Mr Duncan Smith, who was stark-raving bonkers to appoint a front bench partly composed of Eurosceptic fanatics. Incidentally, this is also a theory quietly shared by some of those who were actually appointed to his front bench.

I do not share it. There is reason behind the apparent madness, and it stems from the nature of Labour's landslide last June. The victory was decisive, but the mandate was limited. Tony Blair's pledge to hold a referendum on the euro removed a defining policy area from the electoral equation. William Hague's silly campaign in which he travelled the country screaming "three days to save the pound!" was deflected with effortless ease by the Labour leadership: the euro was not an issue at the election because of the referendum.

The last election, like no other, was therefore only half an election. So why should the Conservatives have a radical overhaul before the other half is resolved? Last week in his conference speech Tony Blair signalled that he was ready to resolve it. What a state this euro debate is in when a statement of the bleedin' obvious becomes a profoundly significant moment. Given that Mr Blair had promised a review of the economic tests within the next couple of years, it was always possible that a referendum would be held in this Parliament. After all, Mr Blair could hardly stand up at the conclusion of this review and state: "We have decided that the economic conditions have been met. We will hold a referendum in 10 years' time."

Still, for the first time, he actually uttered the words that there may be a referendum "in this Parliament", and the symbolism of the gesture is enough to get us all carried away. Just by raising the possibility, by uttering the words, Mr Blair has raised the stakes.

He had always planned to do so, long before the international crisis. Gordon Brown knew that he planned to do so, that in the autumn Mr Blair would do some kite-flying and agenda- setting on the issue. Mr Brown would prefer that there was less of this. He does not go in for it himself. But it is wrong to assume that he will be inevitably opposed to the euro when he conducts his review. He is more open-minded than that, though considerably less enthusiastic than Mr Blair. Equally, Mr Blair is capable of flying a kite and then disposing of it at the first whiff of trouble. Both will be genuinely influenced by economic conditions. For all the corrosive tensions between them, even on this issue they have more in common than most observers realise.

For Mr Duncan Smith a no vote in a referendum would transform his party's prospects. It makes much more sense in the build-up that he has a team more or less singing the same tune, and that Mr Cash is in the chorus yodelling away even when no one is listening. But the louder they sing the more they harm their cause. This is the conundrum that Mr Duncan Smith will not be able to resolve. It was put to me by a candid frontbencher: "We have such a problem with our brand at the moment that we contaminate everything we touch. Our support for a no vote makes a yes vote much more likely."

Supporters of the euro have felt and behaved like an embarrassed eccentric minority for years. But consider the line-up in a referendum. On the yes side would be the war leader and his Cabinet, joined by Charles Kennedy and nearly all Liberal Democrats, plus popular Tories such as Ken Clarke and Michael Heseltine. They will be opposed by Mr Duncan Smith and his Shadow Cabinet, along with Mr Hague making a comeback. In terms of political weight and charisma this will be a more one-sided contest than the referendum on Britain's membership in 1975.

This week in Blackpool there will be some symbolic attempts to make a break with the party's past, to appear more tolerant to the young and ethnic minorities. But only after a defeat in a euro referendum will the Conservatives genuinely be forced to change. If Mr Blair were to take Britain into the euro, which I believe to be increasingly likely, it would bring about the demise of the current right-wing Conservative Party in a way that the last election notably failed to do.