Lord Heseltine: The man with a seditious plan to save the Tory Party

'The parliamentary party should say, "We are going to have a separate leader for the parliamentary party," and they would then choose Ken Clarke. I suspect also that this would bring Michael Portillo back'

Less than six years ago Michael Heseltine was Deputy Prime Minister in a Conservative government that had ruled for nearly two decades. Now, nearly half way through Labour's second term, Lord Heseltine sits in his office several miles from Westminster wondering whether the Conservatives will rule again.

We come to the state of his party late in the interview, having analysed Tony Blair's move to the centre ground and the consequences of "Thatcherism". He makes a devastating analysis of the Conservatives' prospects and offers a breathtaking solution.

"The members of the Conservative Party are repeating, in a worrying way, what happened to the Labour Party in the early 1980s. They have closed in on themselves and withdrawn to the more extreme wing of the party. You see that now in their selections for candidates for the European elections. You see it in elections for the leadership of the party. It is not working. We are at around 31 per cent in the polls when we would need to be at 48 to 50 per cent to have a ghost of a chance of winning the next election. There's no prospect of achieving those ratings under the present management."

He pauses, then says: "We've got a better shadow cabinet on the back benches than we have on the front bench."

Note the use of the term "present management". He does not single out the leader, Iain Duncan Smith, by name. Indeed, the name does not come up in the interview. Lord Heseltine is being deftly subtle and, therefore, deadly serious. He wants Kenneth Clarke to replace Mr Duncan Smith – as a matter of some urgency.

"The obvious potential leader, head and shoulders above all others, is Ken Clarke. Wherever I go I am besieged by people in the party who said I did not vote for him in the last contest because of Europe, but of course I made a mistake. I just find people saying this everywhere. Now here is the interesting point – to their great credit, the Conservative parliamentary party realised this. If the rules had not been changed by William Hague [the new rules gave party members the final vote], Ken would have won. Then he would, in my view, have balanced the European issue. My guess is he would have made Michael Portillo his deputy."

Now we come to his radical proposal. It is so precise and sweeping that he must have given it some thought and perhaps have discussed it with allies who seek the removal of Mr Duncan Smith. "The difficulty now is these leadership rules. If there were to be a re-run of the leadership process the rules might well stop Ken winning again. You are dealing with a small number of people, the party members, with an average age of 67, who are obsessed with this issue of Europe. They're obsessed by it."

Lord Heseltine's words are similar to those expressed in private by some of Mr Clarke's allies in the Commons. They are worried he would lose again. So here is his way around the obstacle posed by his party's members. "The parliamentary party should say, 'Those are the rules of the party as a whole, but we are going to have a separate leader for the parliamentary party.' They would then choose Ken Clarke. I suspect also that this would bring Michael Portillo back into the front line."

Here is the most open advocacy of the Clarke/Portillo "dream ticket" yet. Lord Heseltine knows he is making a sensational suggestion, in effect calling for the parliamentary party to temporarily rebel against the membership. But he clearly believes that the crisis facing the party is serious enough to merit such a move.

"People can laugh at the constitutional aberration I have put forward. But I am interested in seeing the Tory party recover and that would deal with the membership. It would be uncomfortable, but in a relatively short time there would be a suitable adjustment," he says. In other words, the membership would soon get used to Mr Clarke as the leader even if he was imposed on them by a parliamentary revolt.

His broader analysis of the unrest at the top of his party is even more damning. "A whole lot of people would like to be leader and they are waiting for a time when they can get such pre-eminence that it is worth provoking the battle. Until they get to that point, they won't rock the boat. Then it will be too late because we are close to a general election and we will get a re-run of the last election with the same result. I want to see the Tories win. It might be impossible at the next election as the gap is so wide. But to win the one after that you've got to close the gap at the next one. There's no point in being the permanent Lib Dems on the touch-line of politics. I think the Tories will pull themselves together. The only issue is when."

We are speaking in Lord Heseltine's office at his Haymarket publishing empire in Hammersmith. He helped to set up the company in the 1950s, making him financially independent as he climbed almost to the top in British politics. Evidently, he still gets satisfaction from its enduring success. But out of his office window the outlines of Parliament can be seen in the distance. He cannot leave it behind. He does not want to let go. As well as urging a parliamentary revolt to bring about a Clarke leadership, Lord Heseltine keeps a wary eye on Tony Blair. Where Mr Duncan Smith is only implicitly in his sights – as a leader who should be urgently removed – Mr Blair gets a much fuller analysis.

"Tony Blair has three legs to his stool. The first is that he was the man who brought the Labour Party to power, having laid the ghost of the extreme left. The second is that he has promised new thinking and resources to the public sector and the third is that he was the man who knew our destiny was in Europe. Now Tony Blair's time as Prime Minister has almost certainly passed the half-way mark. He has credit on the first leg of the stool. The jury is out and rightly sceptical about the second leg. As for the third leg – the European leg – there is absolutely no ground for admiration. As all Prime Ministers become obsessed by their place in history, he better start counting the days."

Mr Heseltine is worried that the economic tests will be a "curate's egg", not all good, not all bad, and that they have "become a hurdle of greater significance than the politics justifies". Whereas Mr Blair and Gordon Brown, the Chancellor, insist that entry is an economic issue, his main arguments for entry are political. "If we do not join the euro we would surrender the agenda to the Franco-German alliance. We have got to explain that the power of the nation state has been taken away by supra-national arrangements. In 100 years, Europe will be seen as a role model of how to manage in the new global environment."

Lord Heseltine is ready to join the fray, to campaign for a "yes" vote, but he will only do so when Mr Blair takes the lead. "Blair cannot say, 'You lead and I'll follow if you're lucky.'"

Although he is critical of Mr Blair, I put it to him that I see some similarities in the Prime Minister's agenda – or theoretical agenda – and the one that Lord Heseltine used to follow as a minister: pro-European, support for elected mayors, earned autonomy for public services and local government and targeted public spending to tackle poverty in the inner cities. "I see echoes as well. I gave a speech the other day and I said, 'I don't know whether this is a Conservative audience or a new Labour audience coming to listen to an old Tory to hear about Tony Blair's next policy initiative.' They have changed the slogans, but many of their ideas came from the 1980s and 1990s."

I ask him where this places him – and indeed Blair – in the political spectrum. Where does he stand in relation to Thatcherism? "I don't know what Thatcherism is except a gut reaction to certain predicable circumstances. There was never a coherent set of policies. In the first term, she had a strong team with a variety of views. Gradually, that team went, for different reasons, and the results of a less balanced team were epitomised by the poll tax, which was the beginning of the destruction of the Tory party." As for Mr Blair, he is part of a phenomenon "spread across every democratic country in the modern world. We live in a liberal democratic world with a relatively regulated capitalist approach and the Labour Party which he leads has been brought to terms with that process." Which is how we got on to the Conservative Party and whether it could recover. "They think we need clear blue water, but that means we concede the centre ground to Blair. It's not working."

Lord Heseltine is 69 but he looks much younger, in spite of suffering a heart attack while still in the cabinet. Would he return to the front line of politics under Mr Clarke? "If Ken was there he would not need me and he would lead a balanced team." He adds, mischievously: "It would be wonderful seeing those articulate right-wingers bashing the hell out of the Labour Party. But it depends on the context."

For him, that context means Mr Clarke as leader. A political titan who was once a fiercely partisan interviewee now believes that the future of his party is stake.