John Rentoul: Out of the 'zone', but still in the soup

The problems of the euro could sink even those who wanted nothing to do with it, such as the Conservative Party

The state of the economy is, as David Cameron said to the BBC on Friday, "very difficult". Although in a later interview he dodged a question about the possibility of a double-dip recession by saying that it was not the Government's job to make forecasts any more, because "we have a separate Office of Budget Responsibility". (He meant Office for Budget Responsibility, but he can't remember everything, and his quango-busting government has created so many quangos.)

One of the main threats to the British economy, as the Prime Minister put it in his interview with David Frost on Al Jazeera, is that of "a break-up of the euro or disorderly debt defaults", because "40 per cent of our exports go to eurozone countries".

Which puts him, George Osborne and William Hague in the curious position of lecturing the eurozone members on the need for common budgetary policy and closer political integration. This is not necessarily inconsistent, because the reason that they argued against Britain adopting the euro was that they did not think the currency would work without a single government, which they did not want.

Still, it was fun to read the Foreign Secretary's interview in The Times yesterday. He said he was "vindicated" in having compared adopting the euro to being "stuck in a burning building with no exits"; and in the next sentence: "We want a stable and healthy burning building." (Actually, he said "eurozone".)

One person who was enjoying himself last week commented: "It's remarkable that we should be advocating that our neighbours give up their democracy." The problem for Cameron and Osborne is that this voice of the authentic Conservative belonged to Nigel Farage, whose UK Independence Party advertised its frivolity by announcing at its annual conference that Neil Hamilton, the disgraced former Tory minister, was its latest celebrity recruit.

Ukip may not be a serious party, but its leader has a gift for succinct expression of what most Conservatives think, including that the attempts to prop up the euro are "reinforcing failure" and "making the bust, when it comes, even bigger". Some Tories make that argument in public, including Nigel Lawson, one of Osborne's predecessors, who last week wrote that the imminent collapse of the euro was a "golden opportunity" for the Government to renegotiate European Union treaties and dispense at last with that troubling phrase, "ever closer union".

Indeed, this is an argument that goes beyond the Tory party's internal politics, because many economists think that bailing out Greece, Ireland and an uncertain number of other speculator-carrion is only going to make matters worse in the long run. The counter-argument is that, if the eurozone is going to lose some of its weaker members, now is not the time to do it because that would risk a Europe-wide depression.

The Prime Minister cannot take part in that argument, though, because he wants to be "helpful and constructive", as he put it to Frost. Even if he thought it was in Britain's interest to get the pain of a euro break-up over quickly, which he does not appear to do, there is no advantage in saying so.

Thus we observe the paradox of a government led by the most eurosceptic prime minister ever (with the possible exception of Margaret Thatcher's last few months) politely going along with the federalist attempt to create a United States of Euro-Europe.

The contradictions run through the Government. One minister has taken to carrying a laminated card in his pocket with the number of votes held by each EU country under the system of qualified majority voting, so that he can see at a glance if a policy is likely to be voted through. Romania is often the key, apparently, with the most votes after the big six. Even a Liberal Democrat minister was heard to exclaim, "Oh, we can't go on like this," when yet another official explained that he couldn't do anything about an EU law.

One such is the agency worker directive, which comes into effect next month. This well-intentioned legislation makes it harder for employers to take on temporary workers, and ministers were desperate not to enact it. Steve Hilton, Cameron's most influential adviser, ruffled the mandarins by commissioning legal advice for the Prime Minister's office on how to avoid it (protocol says that is a matter for the Business Department). The advice was, in effect, that nothing could be done.

Hilton's frustrations with the restrictions of EU law, and of law derived from the separate European Convention on Human Rights, are shared, privately, by many ministers and, publicly, by at least 90 Tory backbenchers elected last year, who meet tomorrow. In his interview yesterday, Hague got back on his "Save the Pound" flatbed truck. He welcomed this loyal rebellion and gallantly blamed the Lib Dems for the Government's failure to "repatriate some powers" from Brussels.

The stage is set, therefore, for economic policy and European policy to intersect again. The last time this happened, over the exchange rate mechanism, 1988-92, it was disastrous first for a Conservative prime minister and then for a Conservative government. This time, another recession on its own might be survivable for Cameron. It is not as if the Labour alternative, even if it is right, is seen as credible.

What would be dangerous for Cameron's chances of re-election (on new, more favourable, boundaries), would be if the economy, already falling behind Osborne's "on the road to recovery" forecasts of last year, became part of a divisive argument within his own party about Britain's relations with the rest of Europe.

And the euro crisis can only get worse over the next few years.

independent.co.uk/jrentoul