The euro level "is not a problem as long as it doesn't import inflation," Eichel said in an interview with The Wall Street Journal Europe Tuesday, when the single currency was trading at $1.0408. The euro has recovered slightly from its record lows of last week, but is down almost 12% since its introduction in January.

At the moment, the inflation picture in the 11-country euro area looks fine, Eichel said. "We have price stability and the interest rates are low, two signs that the domestic market of the euro is strong," he said.

Despite the favorable inflation outlook, Eichel, who took office in April as head of Germany's powerful Finance Ministry, assumes the reins of the world's third-largest economy as it struggles to recover from last year's slump. The German economy, a crucial engine for the entire euro zone, is expectedto grow a mere 1.5 per cent this year, down from 2.8% last year.

Eichel, following Oskar Lafontaine's short and controversial stint as finance minister, has also had to quickly come up to speed on an array of domestic and international issues as Germany holds the presidencies of the European Union and the Group of Seven major industrialized countries. In a wide-ranging interview, Eichel discussed the recent debate over the euro's weakness, the behind-the-scenes story of EU finance ministers' recent decision to allow Italy leeway on its deficit target and the financing outlook for the reconstruction of war-torn Kosovo.

Eichel stressed it is important to put the euro's recent slide in context. "We don't want a weak currency, that is fully clear," he said. "But one has to look at the mark, which had similar fluctuations against the dollar." He added that the euro's external value is no longer crucial to the euro-zone economy as a whole because it is much less affected by exports now that the 11 countriestrade among themselves with a common currency.

"Clearly, the export-oriented industry is happy [about the weaker euro]. Others are less happy," Eichel said. "But the point of what is going on with the euro is that Europe is a domestic market because exports [to markets outside the euro zone] amount to only 12 per cent" of the economy.

The euro took center stage at the recent EU summit in Cologne as European officials wrangled with the problem of how to avoid sending confusing signals to currency markets. In contrast to the U.S., where remarks about currency markets are largely confined to the Federal Reserve Chairman and the Treasury Secretary, the euro-area's 11 countries have many more officials in a position to comment. Ahead of the summit, Eichel had pushed for an agreement to impose restrictions on official comments about the euro. When no written statement on the topic materialized, critics said European officials looked worse than they had before.

But Eichel said he believes progress has beenmade on this front. Euro-zone finance ministers agreed informally at the summit to be more reticent in their comments on the euro. In "exceptional cases" when the officials comment on the currency, they will coordinate, he said. The agreement is "informal" in deference to varying traditions concerning the finance minister's role in different euro countries, he said. "It was a very informal story, but these informal things are sometimes very effective," he said.

Among the recent blows to the euro was the decision by EU finance ministers to allow Italy to raise its target for its 1999 deficit to 2.4% from 2 per cent of gross domestic product. The change doesn't technically break the limits set in the "Growth and Stability Pact," which is aimed at keeping finances of euro-member countries in line. However, the decision to loosen any requirement for Italy so early in the euro's lifetime triggered major market worries about the foundation of the new currency and sent it tumbling.

The Wall StreetJournal