Clarke sceptical but in no mood to appease rebels

Last night's keynote speech by Kenneth Clarke shows a Chancellor in strongly questioning mode over the detailed operation of a European single currency, but making no concessions to the ideological arguments put by Euro-sceptics in a still-divide d Tory party.

Mr Clarke duly reflected the Prime Minister's recent remarks by emphasing that in addition to the Maastricht treaty's "nominal" economic convergence criteria for creating the currency, "we should not lose sight of the need to address the deep- seated structural differences within Europe's economies".

Citing a fresh area of uncertainty, the Chancellor said many key principles needed to be agreed about the operation of the European Central Bank that would conduct monetary policy. The combination of lack of economic convergence and of clarity about detail meant the choice of whether to move to a single currency would be unlikely to face Britain for "some years to come," Mr Clarke said.

But he emphasised that it would be "folly" to decide now, "simply in response to the short term political pressures of today". It was "quite possible to have monetary union without political union", he insisted.

Listing the potential benefits, Mr Clarke said: "By reducing an element of instability and removing the risk of competitive devaluations, a single currency could improve the efficiency of the single market ... and could - and I emphasise `could' - securelow inflation and lower and more stable interest rates over the medium-term."

He added, however, that "the adoption of a single currency would not be without its risks. An ill-thought out, ill-conceived monetary union would do Europe harm." Mr Clarke's declaration that the arguments of both extremes of the European argument were "far too simplistic" were enough to enrage hardline Tory Euro-sceptics. He appeared to pour more oil on the flames by saying: "The European Union has always involved some pooling of sovereignty. But the possible addition to this pool of the decisions thatI take at the moment with Eddie George on the level of our interest rates would not herald the end of the nation state."

In a clear slapdown of his party's most extreme sceptics, Mr Clarke said it would be a tough job to keep Britain's economy the healthiest in Europe. "But we are not a country which should aim for the role of a member of the European Economic Area withoutpolitical involvement in the European Union. That ... does not match the history or the ambition of the United Kingdom."

Labour said a speech supposed to unite the Conservative Party had left its divisions wider and deeper than ever.

Gordon Brown, the shadow Chancellor, said: "While Mr Clarke attacks the Euro-sceptics as `foolish', `simplistic' and `ridiculous', it is his number two, Jonathan Aitken, who holds these views."

Mr Aitken, Chief Secretary to the Treasury, said in a GMTV interview on Sunday: "I don't want to see a single currency, period ..."

Charles Kennedy, the Liberal Democrats' European spokesman, said that, taken with last weekend's strongly pro-EU article by Michael Heseltine, President of the Board of Trade, Mr Clarke's speech showed that "at last, Conservative pro-Europeans are adopting a more robust stance". Iain Duncan-Smith, Tory MP for Chingford and one of the 100-plus MPs who signed yesterday's Early Day Motion praising John Major's hardline approach, said last night: "Clearly the Chancellor accepts the serious argument put forward by many economists and central banks that the whole concept of a single currency is deeply flawed ... He is coming to terms with the reality but is holding on to the great dream."

Eight whipless Euro-rebels will today join mainstream Euro-sceptics in signing the EDM. One MP said: "This is the route to a bridge between them and the Prime Minister."

Mr Duncan-Smith commented : "The key factor is the Prime Minister's approach last Friday and in early January. The Chancellor is going to have to move that way."