Blair's euro policy 'shot to pieces' by his advisers

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Tony Blair's policy on the euro was in disarray last night after the man who drew up the Government's five economic tests for British membership declared that it was ultimately a political decision.

Sir Alan Budd, the former chief economist at the Treasury, contradicted claims by Mr Blair and the Chancellor that economics would determine the timing of a referendum. His remarks backed up those by Gus O'Donnell, Sir Alan's successor at the Treasury, that it was impossible to arrive at a "clear and unambiguous" verdict on the economic benefits of joining the euro.

The Tories claimed that the two men most qualified to speak on the subject had in the space of 24 hours "shot to pieces" a policy that the Government had hidden behind for the past five years. The Prime Minister and Gordon Brown have repeatedly stated that the Treasury's assessment of the issue must find a clear economic case for membership before a referendum can be held.

Mr Blair was forced to defend the five tests yesterday as Downing Street made clear its irritation at Mr O'Donnell's comments, which were made privately to a group of students late last year. However, Sir Alan, who also served on the Bank of England's Monetary Policy Committee until 1999, backed up his successor with even more forthright remarks.

Speaking to BBC Radio 4's World at One, he said there was always going to be disagreement over whether the five tests, which cover the euro's impact on jobs, flexibility and other issues, had been passed. "Ultimately, it's political. It's political because it must be taken by [civil servants'] political masters. It is also political because the question ... in the end is not going to rest on economic arguments but is going to rest on the nature of the European Union and our part within it," he said. "The five tests can be examined, and the Treasury document can say how close we are to convergence. But there's always going to be room for disagreement. The final question, 'is this in our economic interest?', cannot be answered clearly and unambiguously."

Mr Blair told journalists on his trip to India that "there's no change in policy as I constantly say every time I am asked". Challenged on whether the tests mattered, he replied: "Of course. I have always said that."

His official spokesman added: "The economic tests are real. The assessment, when it will be made, will be real. I will leave the Treasury to speak for Gus O'Donnell."

Despite the embarrassment caused by Sir Alan, a new emphasis on politics rather than economics will be welcomed by some of Mr Blair's pro-euro allies as it in effect ends the Chancellor's stranglehold over the subject.

Jack Straw, the Foreign Secretary, repeated the Government line when he said that it had taken the political decision to join in principle but only if the economics were right. "Entering into the euro will in the end be a personal decision, by up to 30 million British voters. The insinuation is that somehow this is ... a decision we are going to bounce people with, and we're not," he said.

The Treasury said Mr O'Donnell, its head of macroeconomic policy and international finance, had "no recollection" of the remarks he is reported to have made at a private talk to economics undergraduates last year. "What he actually said was that a room full of economists might all have different views but that any decision that the Government took about the euro must be based on a thorough assessment of the tests."