Potential ally signals could back Cameron's EU referendum plan

By Andrew Osborn and Kylie MacLellan CORFE MULLEN, England (Reuters) - The leader of British Prime Minister David Cameron's junior coalition partner has signaled his party might agree after all to a referendum on staying in the European Union in any deal on a new center-right coalition after next week's election. Cameron's Conservatives, with a powerful Eurosceptic wing, have pledged to renegotiate Britain's ties with Brussels and put the outcome to an in/out popular vote in 2017. Cameron says he won't return as prime minister if he can't deliver a referendum, making it a potential deal-breaker if he needs a coalition. Deputy Prime Minister Nick Clegg's pro-European, centrist Liberal Democrats have long resisted such a plebiscite, which they consider unnecessary. But in a Reuters interview, Clegg made clear the issue would not be a show-stopper. "I am not going to draw a red line against having a referendum," he said on Monday afternoon, talking in the back of the yellow "battle bus" he uses to criss-cross the country. The May 7 election is unusually unpredictable and the Liberal Democrats may emerge as kingmakers despite winning far fewer seats than in 2010. The Conservatives and the center-left opposition Labour Party are level in most opinion polls and neither seems likely to win an outright majority, so the next government may well be another coalition. Clegg made clear he would not change his party's EU policy so close to the election. But he sent the strongest signal so far he was open to a deal on the issue, a stance confirmed to Reuters separately by a senior source in the party. "To be pro-European doesn't mean one is fearful of the British people. There are some circumstances in which a referendum should take place and I have always felt that," Clegg told Reuters. "We should never allow ourselves to be cast as the people who are frightened of giving the British people a say, we are not." The Liberal Democrats remain publicly opposed to Cameron's plan, believing such a vote would only be justified in case of a further major transfer of power from London to Brussels. Britain held a referendum on the issue in 1975, two years after it joined the European Economic Community, voting 2-1 to stay in. Clegg's shift is driven by a realization that EU policy is his best bargaining chip in any future talks to form a coalition with Cameron, a senior Liberal Democrat source told Reuters. The source said Clegg would be open to discussing a possible deal in exchange for what he regards as a fairer way of closing Britain's sizeable budget gap than the Conservatives propose. "What's really important to us is how you go about deficit-reduction. We don't want unnecessary cuts and we don't want a situation where there's not a penny raised in tax," he said. 'WE WOULD MAKE THEM PAY' The party source told Reuters the referendum issue could give Clegg powerful leverage in any negotiation, but he would try to amend Cameron's EU plan as well. "The more somebody wants something then the more you could get in return and they really want that to keep their party together," the source said of the Conservatives. "We can basically have any red line we write and the Tories (Conservatives) have to agree to it. We would make them pay." The Conservatives want to cut welfare spending by 12 billion pounds ($18.39 billion) and reduce rather than raise taxes. Clegg complained that Cameron, under pressure from the rise of the anti-EU UK Independence Party as well as his own Eurosceptic lawmakers, had changed his policy on Europe "at least half a dozen times". He criticized what he called the Conservatives' impossibly vague plans to renegotiate the terms of Britain's EU membership. "I genuinely don’t know what they want," said Clegg. "This is their problem. If actually what they reveal is a bunch of rather commonplace changes, then their own right wing are going to go nuts. If they announce a whole load of things which are undeliverable, the Germans and everyone else will go nuts." Clegg said this election was the most important since 1979, when free market champion Margaret Thatcher came to power, in terms of its potential to change Britain's direction. "This election is easily as important if not more so," he said, citing the risk an exit from the EU and a break-up of the United Kingdom under pressure from surging Scottish nationalists. "The consequences if you take a wrong turn could at its worst - and I'm not predicting this - mean that within a matter of years, two unions which are pivotal to the prosperity and way of life of everybody in Britain are lost." ($1 = 0.6524 pounds) (Editing by Guy Faulconbridge and Paul Taylor)