Well that is the gossip dug up by the Guardian this evening. Weirdly though it would be appalling if it were to happen, I can see how the Europeans could see it as appealling.
1) Britain has to have one of the top jobs, mail to try to placate the UK's notorious scepticism.
2) If he got that job then Blair wouldn't become President. From what I hear Wiliam Hague's campaign is begining to bear some fruit. Brussels and the Chancellries of Europe are beginning to understand that as much as they dislike the Tories, making Blair President could spark all out diplomatic warfare with the likely incoming Tory Government. Though they could handle it (probably, they don't yet know how far they can push Cameron. He did in the end leave the EPP). However though it wouldn't be a "declaration of war" in the same way as the Blair appoitment, it would seriously piss off the Tories, particularly Hague who he has been winding up a treat over the Poles and Lithuanians in the CER.
3) He is as Iain Traynor points out "seen as the most genuinely europhile of senior people in the Brown cabinet".