The Labour party is in peril. The flailing political right, intellectually bankrupt but keenly culturally aware, has unleashed a social and political civil war to save itself. Brexit marks not the end but the beginning of a new politics in which the right is transmuting into the party of English nationalists – the Brexit party engulfing mainstream Toryism. The ugly forces have to be confronted, argued against and beaten. No quarter is possible.

By refusing to take up arms, the Labour party has colluded with the Brexit right, created the opening for the Lib Dems and Greens and thus permitted the emergence of a new multi-party system. If Labour continues to temporise, the first past the post electoral system will fell it. The Lib Dems, unapologetic Remainers who are beginning to recognise that their Keynesian tradition offers better policies for the times than soft Thatcherism, have the opportunity to become the new anchor of British progressive politics – strengthened, if they are sufficiently strategic, by working closely with the Greens.

The Remain alliance at the Brecon and Radnor byelection, in which both the Greens and Plaid Cymru have stood down to make the Lib Dem the unambiguous Remain candidate, is a potential forerunner of what is to come. The Labour party risks becoming a marginalised rump – pockmarked by antisemitism and hopeless utopianism – squeezed between rightwing English nationalists and a dynamic Remain coalition.

Jeremy Corbyn and the powerful coterie around him do not comprehend the new politics, resisting the unacceptable “Blairite” message that Labour has to be a Remain party. The concerns of the up to 30 Labour MPs in Leave-voting constituencies have offered them the pretext for indulging their own time-warped anti-EU prejudices at the same time as being wholly outflanked in a rightwing bidding war to spend, spend and spend – Nigel Farage’s £200 billion “ booster” plan for British regions topping Boris Johnson’s £100 billion infrastructure plan.

Who is pro austerity now? Imagining that Labour’s “ground army” knocking on voters’ doors, along with Corbyn’s over-hyped campaigning skills, are going to turn around the party’s fortunes in a general election – now nearly certain within the next 12 months – is to take refuge in fantasy.

The Lexit left congratulated itself on besting Labour’s Remainers at the April meeting of the national executive committee, going into the Euro elections with an appeal-to-all-sides, referendum-as-last-resort manifesto pledge. A mere 10 weeks later, the vacuity in terms of values and philosophy – let alone the political black hole – is there for all to see. Labour’s opinion poll rating is dire and its electoral performance awful. The shadow chancellor, John McDonnell, is right privately to describe Labour’s stance as a slow-motion car crash, wrong only on one count. It is unfolding at speed.

Facebook Twitter Pinterest Shadow chancellor of the exchequer John McDonnell, who has publicly declared himself a convinced Remainer. Photograph: Stefan Rousseau/PA

The strains at the top have become intense. Seumas Milne, Corbyn’s director of strategy, wants the Tories to be blamed for a Brexit which privately he wants ardently: once it’s done, runs the calculation, voters will look to Labour to address the economic and social consequences with a full-blooded Labour programme. What is required now is to keep kicking the can down the road, triangulating, being ambiguous and avoiding being labelled Remain. Short-run electoral pain for long-run gain. Corbyn, congenitally indecisive and happier to float above the fray in a comfort zone of anti-austerity, colludes.

McDonnell profoundly disagrees. He is smart enough to recognise the new landscape and thus sees deputy leader Tom Watson’s core point: the values of Remain – anti-rightwing populism, pro-openness, internationalist – are Labour values. There is no escape. Labour has to be a Remain party to retain both its link to its core values and its core vote. Nor would this change post-Brexit as a demonic rightwing English nationalism takes hold: electoral victory will not fall into Labour’s lap.

Publicly, McDonnell has declared himself a convinced Remainer; my understanding is that Corbyn has been advised by some confidants to sack both Milne and Karie Murphy, executive director of his office – and set an early July deadline to end the time-wasting “consultation”. Corbyn has ignored this – mindful that much of the post-2015 Labour membership will back him against any challenger. Any challenger? The whisper is that McDonnell, guarantor that any successor will be rooted in a solid radical left economic policy, is in the market for supporting a leadership challenge as long as the left’s control of the party is retained afterwards.

Keir Starmer hesitates, knowing that to fail will end his political career. Emily Thornberry, shadow foreign secretary, covets the job but is not trusted by the left. Angela Rayner, shadow education secretary, is, like Starmer, wary of breaking cover too early. On the Corbynite left the frontrunner is Rebecca Long-Bailey, although her sponsors worry whether she can become politically fluent fast enough. A Rayner or Starmer challenge on a Remain and Reform UK platform, backed by McDonnell, would have a better than evens chance of success – and then of doing well electorally.

The wider hope is that no bloodletting will be necessary: the Equality and Human Rights Commission will find that the leader’s office was guided by loyalty to Corbyn in the way it treated allegations of antisemitism, making his position untenable. Or more simply he knows his weaknesses, and if the left’s control of the party is sustained, he would step readily aside. Meanwhile, deputy leader Tom Watson musters his forces: for him, removing Corbyn is purposeless unless mainstream Labour regain control of their party. The manoeuvring is intense.

What will break the dam will be the Johnson government, and the possibility that either this parliament will be faced in October with the choice of revoke or no deal – or plunged into a Leave/Remain general election, with the Tories having some kind of electoral pact with the Brexit party.

There will be other pitched battles before this civil war is over, but Labour is now facing an existential choice about whether to enter the war at all. What McDonnell, Starmer, Watson and Rayner are contemplating takes raw bravery – but they have only weeks to act. To shrink before the challenge is to betray their party and their country.

• Will Hutton is an Observer columnist