Don't lose sleep over the falling euro. One of France's leading economists says the drop through the parity barrier was a natural process, a mere "nominal illusion", which poses no threat to the single currency.

Mr Jean-Paul Fitoussi, an adviser to Prime Minister Lionel Jospin who also presides over the OFCE economic think tank and teaches at the Institut des Sciences Politiques, shares the French government's relaxed attitude towards the euro slide.

"The French suffered far too much from the strong franc policy (of parity with the deutschmark) to complain when the euro falls," he said. "The dollar didn't rise against European currencies until 1997. But you never heard Americans moaning that the dollar was weak."

The European Central Bank raised interest rates by one quarter of a percentage point yesterday but Mr Fitoussi said that if he were the ECB governor, Mr Wim Duisenberg, "I would try to keep my sang-froid and wait as long as possible before raising interest rates."

In the past, he explained, France maintained high interest rates so the franc would not fall against the deutschmark.

"It completely smothered economic activity. Investment stopped. Unemployment rose. Government revenue dropped and the budget deficit went up. It was a vicious circle that led to a long period of stagnation in the 1990s. That's why we had zero inflation. It was a pathological situation."

Mr Duisenberg believes that a weak euro increases the risk of inflation. Au contraire, Mr Fitoussi said. "The sole mission of central bankers is to talk about their fear of inflation," he joked. "I say there is absolutely no risk. If the euro had remained strong, there was a risk of deflation."

Three factors preclude high inflation in Europe, he said. "The greater competition created by globalisation means there is no real inflation in the world at the moment. This is amplified by monetary union because it enables European consumers to compare prices - a structural factor that lowers inflation.

"Finally, because of mass unemployment, Europe has known only moderate wage increases in recent years. For inflation to develop you have to have a cycle of rising prices and salaries."

When the €11 created the single currency in January 1999, Mr Fitoussi says, they believed US economic growth was about to slow down, and that growth in Europe would be stronger than it has been.

"So the first quotation of the euro was founded on what proved to be false assumptions. It was overvalued. US growth has turned out to be very robust. And although European economies are recovering, the take-off is relatively slow."

Remember how reluctant the Germans were to trade their deutschmarks for euros? It is the German economy which is now dragging the euro down, Mr Fitoussi explained.

Because of the enormous cost of reunification, "the deutschmark would have depreciated against the dollar even if EMU hadn't happened. In their analyses of reunification, all serious German economists said depreciation of the mark would be necessary. That depreciation is taking place now, but it is healthy. Once the German economy has recovered sufficiently and US growth slows down, the trend will reverse."

When they met in Brussels last Monday, euro zone finance ministers issued a statement saying that "a strong currency goes with a economy".

But, Mr Fitoussi noted, "the European economy is in convalescence. It doesn't make sense to have a strong currency when we still have an average of 10 per cent unemployment."

A weak euro was desirable not so much because it helps Europe to export, but for the sake of internal demand within the euro zone, which would be threatened by higher interest rates.

English-speaking economists have blamed the falling euro on "structural handicaps" in the euro zone. "They mean that social protection in continental Europe is too extensive compared to Britain and the US," Mr Fitoussi said. "But the proof that they're wrong is that our economy is growing. We did not have structural problems but a monetary policy of parity with the deutschmark that stifled growth."

Mr Fitoussi admits that the Republic, with its strong growth and full employment, is more vulnerable to inflation than Germany, France or Italy. Ideally, Irish officials would have adopted a restrictive monetary policy, that is to say higher interest rates, to prevent inflation. But as members of the euro zone they cannot set their own rates.

"The best policy in Ireland would be to increase the budgetary surplus to prevent inflation - if inflation is really a danger," he said. The prospect of an Irish pound at 75 pence sterling should not frighten anyone, he added. If British products become too expensive, they can easily be replaced with French or German imports.