The Irish Government should not increase taxes in order to reduce inflation, the Nobel Laureate economics professor, Robert Mundell, said in Dublin yesterday.

Prof Mundell, who delivered a lecture in Trinity College last night on macroeconomic policy in the EMU and the Brussels-Dublin budgetary controversy, said the European Commission had reasons for its recommendation to censure Ireland which were nothing to do with inflation but more to do with discipline.

Prof Mundell - a former adviser to the Commission as well as the OECD and other multilateral institutions - said Brussels was keen to ensure that Ireland met the broad economic guidelines to which it had agreed. "The Commission did not want to create a precedent that the guidelines could be ignored."

However, he added that when the Commission pointed to Irish inflation as justification for its position, it had been a "very bad idea". To say that tax rises could have an impact on inflation is simply wrong. "Irish inflation had to increase as a result of higher productivity and growth," he added.

Speaking at a lunch at AIB Capital Markets earlier yesterday, Prof Mundell - from New York's Columbia University - stressed the importance of supply side measures such as increased competition. "Fiscal policy is the only variable. Before there was devaluation; now the only option is back to really basic discipline which is hard and will be particularly hard for the accession countries."

He also insisted that different European States did not need different interest rates any more than different US states did. "If Ireland is growing at 10 per cent or even 6 per cent and France is growing at 2 per cent, it just means the demand for money will be higher in Ireland. The optimal result will be that if Ireland is expanding rapidly, the growth of money will be equal to the demand for money."

This also implies that a global monetary union would work, Prof Mundell said.

He pointed out that the three main currency areas of the dollar, euro and the yen were all areas of price stability. Effectively, inflation has been "licked" by all three central banks. The main source of instability is the huge sweeping changes in exchange rates, for example, the huge depreciation in the euro since mid-1998. "This is unnecessary, counterproductive and very damaging."

He added that real danger would emerge if the US was ever to force through another international accord which would ensure that the euro strengthened to say above $1.10. "That would be a very bad and dangerous situation for Europe."