The fact that Irish inflation is higher than the rest of the euro zone is entirely appropriate, according to Prof Francesco Giavazzi of Bocconi University in Milan.
In comments critical of the European Commission, where his Bocconi colleague Mr Mario Monti is competition commissioner, he added that increasing the Exchequer surplus as Brussels wants may not be necessary. He described the two positions as the difference between the bureaucratic and the intelligent view.
Speaking at a Bank of Ireland/UCD sponsored seminar in Dublin Castle last night, he said there was a strong case for spending the surplus to finance public investment to keep public infrastructure in line with the rapidly growing economy.
Addressing an audience which included the Minister for Finance, Mr McCreevy, Prof Giavazzi's one criticism of Government policy was that it was trying to prevent wages rising. It should not, because wages need ed to rise to allow the economy make the necessary adjustment.
The professor, who was a member of the council of economic advisers to former Italian prime minister Mr Massimo D'Alema until 2000 and former director general of the Italian Treasury, warned the same did not apply to Spain, and Portugal, other euro-zone members with higher-than-average inflation.
"There the current account deficit is large, and getting larger, but, in contrast to Ireland, it is not matched by high investment and high productivity growth."
Prof Giavazzi argued that the Irish economy should be slowed down by increasing the relative price of Irish goods and thereby increasing the real income of Irish people.
The professor, who is also a member of the Strategic Committee of the French Treasury and a London group monitoring the European Central Bank (ECB), also argued that, in a common currency area, inflation differentials were the mechanism for adjusting real exchange rates.
For a country belonging to a currency union to have higher inflation than the average may therefore be "entirely appropriate". "After convincing citizens that inflation was bad, governments and the ECB must now go to step two and explain that temporary inflation differentials can be desirable, leading to higher real income and the proper macroeconomic adjustment."
According to the professor, the Republic can sustain high growth for the foreseeable future, but not quite the current rate.
He added that the fast growth and strong investment demand in Ireland mean that the current account in Ireland should be in deficit. This is the situation in which the US has increasingly found itself in recent years.
For this to happen the slowdown needed to come through a reduction in external demand which meant higher inflation and real exchange rate appreciation, Prof Giavazzi added.
