Question: The euro debate could be characterised as being about relations between Tony Blair and Gordon Brown and whether people are eurosceptic. Is that a fair assessment?

Jon Cruddas: It's a terrible indictment of where we really are. The most profoundly important issue in front us - whether to join the euro - is dominated by caricature. On the one hand, those who are in favour of an early entry are perceived to be selling out our heritage, sovereignty and history. Those who aren't in favour are seen as little Englanders whose actions border on xenophobic.

It's incumbent on us to establish that there is a legitimate, bona fide, social democratic, left of centre position which is cautious and sceptical on some of the arguments around early entry into the euro. I actually think that a sceptical approach is more the preserve of the left than it is the right especially when you look at the orthodoxies that dominate the functioning of the bank, fiscal policy in the eurozone and the like.

Question: Why do you think it is something that only the right has focused on?

Jon Cruddas: In the Labour Party it's a product of modernisation over the last 20 years. The 83 manifesto was all about pulling out of Europe and exchange controls and the like. Turning around these policy positions was central to modernisation and Neil Kinnock's long march through the institutions of the party. Successive leaders' reform agendas always had as their cornerstone that we are a pro-European party. I think a lot of people therefore see it as axiomatic that we are a pro euro party, therefore, deductively, early entry a good thing. Pro-euro positions are therefore seen as emblematic of New Labour itself.

Mixed in with this has been an historic but until recently latent anti-Americanism in many quarters of the Labour Party - a hangover from Cold War positions. This is now growing because of the War. In terms of economic and social policy there is also a perception that a mature welfare economics dominates social democracy in Europe and we should embrace this rather than the de-regulatory North American agenda.

Cumulatively it's almost an article of faith to be pro-euro in New Labour. Add to this the fact that often the left or centre left has failed to establish an authentic, cautious approach to monetary union and the economics of it, then cumulatively many in the labour party see scepticism as the preserve of the right.

Question: Do you think the PM is stuck in 1983?

Jon Cruddas: There could be am element of truth to this. In one sense it's a characteristic of many Labour MPs who lived through the whole of that period who got elected in 1983 like Tony Blair. They are actually scarred by that whole experience to such an extent that there's too much of a preoccupation around the political fault lines that emerged out of that period.

I'm not scarred by it at all; I think we've transcended a lot of that now and we can debate around core issues rather than it being perceived to be axiomatic that New Labour or anyone who wants to associated with a modern Labour Party has to read a very precise policy script, for example over the issue of the euro.I think there is a more fluid policy space there which is not simply a binary thing about whether we're old Labour or new labour - we should be past that now.

But it's understandable that a lot of people who lived through that period in terms of being elected representatives then, can't go that necessary next stage in terms of debate. Things are gradually changing however.

Question: Is it time to drop the New Labour mantle?

Jon Cruddas: Peter Mandelson said it should be New New Labour but that was ridiculed. I can see the point of what he was saying but the trouble is New Labour is seen as being associated with certain cast-iron political orthodoxies within the Labour Party.

Whereas I think we need to find a general methodology which seeks to create a modern, centre-left social democratic Labour project which is not living in the past, which is continuously seeking to renew itself and is not associated with a very prescriptive series of policy orthodoxies. Rather, it actually embraces debate rather than closes it down.

The euro is a classic example of this. For me arguments for early entry, rather than being New Labour, are actually a hangover from a specific form of late 80s political economy.

Question: What are the key things you would advise Tony Blair to do to move the euro debate forward?

Jon Cruddas: The key issue is fiscal policy - the mixture of tax and expenditure. For example, I listened to a debate recently where a colleague and friend of mine Chris Bryant was saying - almost as a by-product - that the EU growth and stability pact will be reformed so there isn't really an issue about our public services agenda being compromised due to early entry.

Well it is a key issue for me. A year ago within the Commission it was assumed that by 2002 there should be balanced budgets. Slightly amended late last year; it now says we should be shaving half a per cent each year off our budget deficit to reach balanced budget. This is against the backdrop of three per cent Maastricht criteria in terms of the management of deficit.

Now the fiscal stance developed by the government is a much more creative mixture of borrowing and taxes to consolidate a very radical real terms re-investment in public services.

This is at odds with fiscal policy in the European Union. We need to be more precise about the reform that needs to take place. A year ago when we said there were real dangers for the government's domestic fiscal strategy if we joined up we were laughed out of court. People who are now saying the reform process is a good one weren't even embracing the issue of reform a year ago. For them now to say that fiscal policy will not be compromised because reform is underway is astonishing.

CAP is another good example. The third issue is what it means to be a citizen in a modern Europe. We have the Convention on the Future of Europe developing. This is a fascinating project that's critically important issue and we know next to nothing about it in this country.

Our objective should be cautious on early entry into the euro, aggressively confront some of these reform agendas and move the whole centre of gravity towards a more democratic agenda which breaks down some of these impenetrable European institutions. We need to create an economic policy with people at the centre rather than orthodox, monetarist frameworks circa the late 80s.

That's what we should be doing rather than seeing early euro entry as some sort of panacea or an establishment of our European bona fides as apolitical party. That's an anathema to me. I'm as passionately European as anyone else but of a specific type of a widened, deepened, democratic Europe.

My concerns are primarily around the fiscal policy. That's what we fought for so long in Opposition for - a creative approach for the role of government in the way it manages the economy.

Question: Has Gordon Brown brought back Keynesian economics?

Jon Cruddas: Technically he has. If you look at the government's agenda since 1997 you can see incrementally a more radical agenda at work. We inherited and kept to the Conservative spending plans. We didn't raise taxation. We hoarded tax receipts from the effects of growth to pay off the debt.

Now in the last two pre-Budget reports and the last budget we've seen a much more creative fiscal stance in terms of both raising revenue through taxation but also through our systematic refinancing of public services. The management of debt as growth estimates dip whilst spending remains in tact is indeed Keynesian.

Question: Given the war in Iraq, is it possible that we can have a referendum this year?

Jon Cruddas: I still think that we will have a referendum this year. The centrifugal political pressures for us to join and the belief among key members of the government that there are issues of destiny and inevitability about it means the likelihood - irrespective of the economic context - is that there will be a referendum this year. And I think the government can win it. I would vote no if there were one but I still think the government can win it.

Rather than the war derailing the referendum, I think it will reinforce the pressures to have one. The experience of the war will demonstrate to the prime minister that he can shift public opinion on big international issues. It has allowed a "new" Europe to emerge and there will be a belief that early entry will allow space to rebuild relations within Europe in the post war period.

Even though public scepticism might be acknowledged, it's a weak scepticism that will be submissive to the type of argument and the juggernaut that the pro campaign will develop.

Our support is soft and flaky; it's broad but it's not deep.

Question: If the prime minister calls the decision wrongly would this bring a collapse of the government?

Jon Cruddas: I don't think so. If the prime minister calls a referendum and he loses, because I am sceptical, I think it would help him more than if he wins it. If he loses it will help his domestic strategy of delivering on the agenda he was elected on. I don't think actually it should be seen as having any seismic effect in terms of the Labour government because it isn't a general election issue. People care about health, education, anti-social behaviour, transport, the fight against crime when they vote at elections.

The press will speculate that it has implications but I don't think it will have much effect. I think he can portray it to his colleagues in Europe as establishing his credentials by calling the referendum in the face of singularly hostile opinion polls and having only just lost it. That's quite a big journey he's taken the country on. Not completed but it will be seen as a key staging post which shifted opinion towards it.

Question: So it's better for Tony Blair to call it and lose than call it and win?

Jon Cruddas: I take a different approach to the government on this. Our ability to influence and shape reform is actually increased by being outside the euro given the strength of the economy and the political traction that we have because of this.

I see influence as being primarily determined by economic strength and not the formal membership of committees. We can propel forward the reform agenda by being outside which we loose if we go in too soon without the necessary reforms in place.

A win would be very negative in terms of the Europe that I want to see develop; more democratic, more creative in terms of fiscal policy, how it deals with Labour markets, welfare policies and the like.

I do not want a referendum. If we do have one I think it is better for the government if early entry is rejected.

Question: In your Downing Street role you worked very closely with the unions. The TUC says it is likely to back the euro to help manufacturing. How do you help that sector if we stay out?

Jon Cruddas: There is this argument among, let's call them early entryists, that the euro is a panacea for manufacturing. If you look at any cursory analysis of our long-term manufacturing problems, if you look at the trend declines in terms of employment and output in the sector since the 60s, it's part of a long trend of failure due to a low wage, low productivity economy.

I have conversations with the Ford Motor Company in my constituency and I have a degree of sympathy with them when they talk about the predictability of exchange rate movements. Of the reduction in transaction costs. The positive effect a devaluation would have in terms of the economics in their markets. But I don't necessarily see it as a panacea for manufacturing.

I think we should be confronting issues of regional and sub-regional economic balance, key issues around infrastructure, patterns of skill formation, help for R and D, links between the sector and higher education institutions and the like. Developing New Centres of Manufacturing Excellence like the one in Dagenham are the building blocks to a thriving manufacturing sector.

We've got to move away from patterns of low wage, low skill industrial production.

On the euro and manufacturing, I would have been more sympathetic if we had been more sympathetic to manufacturing over the last five years. With the publication of their manufacturing strategy, I think the government has now conceded that that we were too preoccupied with the so-called new economy during our first term.

I can understand why that was functional for New Labour but it bore no realities to the world of work and economic change.

If the euro was a panacea then how come our long-term structural problems pre-date the existence of the euro? The euro is no panacea for our long term structural economic problems in terms of manufacturing.

Question: What view do you think the unions will take on the euro?

Jon Cruddas: The TUC has been aggressively in support of early euro entry. I can understand why. Since 88-89 part of the belief is that Europe has a warmer climate on labour market regulation than that operated at home. But it's also consistent with the social policy of Europe. They also see the devaluation as a boost for manufacturing. The quick policy read-across means early entry.

However within the individual unions I think things are changing as some of the more complex issues around budget deficits, public finances and others are brought into sharper focus because of the referendum. We've seen a number of the unions change their position last year and a much more fluid debate occurring.

I think the general dynamic of the unions is towards a more cautious position. I accept that the TUC, the federal union structure, is in support and a number of the key unions are in support but it's not all one way.

Question: What do you think about the government's relationship with the unions?

Jon Cruddas: Six years in and we've had a few spats but generally I think relations are pretty healthy.

There's always a danger of understating what we've achieved in this area which I think the unions should give us more credit for. Such as the minimum wage, the employment relations act and the regulation of working time. The recent shift in terms of the two tiered workforce is of real significance. These are major, major initiatives.

Now we need to see our platform from 97 and 2001 develop. The issue for me is the interface between labour market regulation and public service investment and reform. That's why the two-tier workforce is so important. Our investment and reform agenda has been crowded out since the election because of issues around privatisation and undermining conditions of employment.

The government has to resolve this and then develop a pan-government strategy for its own procurement policy. There should be a system of contract of compliance about minimum standards at work if you want public sector contracts.

Without doing that we add weight to those who criticise our reform agenda as a deregulatory one in terms of labour costs.

This reform agenda will not fly unless we establish a labour market floor underneath it.

There are problems but these are eminently resolvable with enough collective political wit and endeavour.

Question: Do you think Labour is losing its famous grip on the news agenda?

Jon Cruddas: I always think it's been overstated. I'm not quite so sure that we ever had quite the grip that the press or public perceived us to have. I look at these things in a slightly warped way. The first term will be seen as a transitional period where some of the laws of politics were briefly suspended. Now we're actually back to where the normal fault lines of domestic post-war politics actually are.

We've got a Labour government that's doing radical things but which has not quite calibrated how to present this- especially to working class people.

On the other side we've got a Conservative Party that hasn't been able to find it's range on Tony Blair and still in the groove of late 80s Thatcherite economics.

These are the basic fault lines and I'm quite happy with them. A lot of this has been blurred over the last five years but now it is becoming clearer.

Question: What about the whole issue of spin?

Jon Cruddas: It's axiomatic that the media enjoy reporting on themselves. Over the last 18 months I haven't spent a lot of time in Parliament; I've been in the constituency. Through that prism things look very different than they do here.

This notion that public services aren't changing is astonishing. How the press reports it seems strange to me because things are changing. It's a mixed picture, it's slow, it's partial, it's double-edged but things are in general changing.

We've got 47 per cent more police in my area since the general Election and it is having an effect. There's been a radical change in education. This is the real red meat of politics. There are quiet revolutions occurring but they don't appear on the radar politically in Westminster because of the way politics is consumed.

Question: Do you think that's a problem with the way the message is going across?

Jon Cruddas: It's got to be partly our fault. This cannot just be the product of the media. In the first term, for example in terms of labour market policy, even when the government was doing very radical things they refused to articulate what we were actually doing because there was a sense that it wouldn't play well with Middle England.

Now the New Labour, Third Way approach - whatever you like to call it - is in danger of turning in on itself- especially in terms of more traditional parts of our coalition, because people don't believe we have done all these things because they have not been articulated.

There's a sense of a heartland failing politically and falling off the edge where in actual fact we are materially transforming the lives of many people especially in areas like mine.