A Nobel award winning economist has defended the Government's economic policies and sharply criticised the EU for taking the Minister for Finance, Mr McCreevy, to task over the recent Budget.

Prof Robert Mundell, an economics professor at Columbia University in the US, accused the EU of having "a hidden agenda" and said the Government's tactics were the correct ones.

Prof Mundell, who was addressing the World Economic Forum in Davos, said the new "Brussels-economics" were completely wrong and that Mr McCreevy's implementation of tax cuts when the State was running large surpluses was "exactly correct". He said that was the best way to maintain growth in the long term.

Prof Mundell's views will be warmly welcomed by Mr McCreevy who has accused Ireland's European critics of being jealous of Ireland's economic success.

Prof Mundell, a Nobel prize winner in 1999, said the European Commission's criticism of Irish economic policy was solely to do with tax harmonisation and not economic policy.

Prof Mundell is considered the spiritual father of the euro for his theories on monetary zones. The ECB chief economist, Mr Otmar Issing, and the head of the Bundesbank, Mr Ernst Welteke, were both on the same panel but did not counter Prof Mundell's comments.

"The hidden agenda is establish a framework for tax harmonisation as Irish tax rates are far lower than elsewhere, it is not about macro policy," Mr Mundell said.

He added that it would be a major error for Ireland to harmonise taxes upwards and that Europe should be moving in the Irish and UK direction.

Responding to another question, Mr Issing said he believed that peer pressure on fiscal policy was working and that Government spending must be constrained. He added that he welcomed the emergence of the Anglo Saxon view - or that of the UK and Ireland - towards lower Government spending and taxes. Mr Mundell's view backs up Mr McCreevy who earlier this week said there had been some "green eyes" cast upon the prosperity of the Irish economy. The Minister said the State's success in securing low rates of corporation tax to attract foreign investment was a particular bone of contention for other member-states.

Mr Mundell's intervention will greatly assist Mr McCreevy when he argues Ireland's case at a forthcoming meeting of EU finance ministers on February 12th. The Ministers are due to discuss Ireland's Stability Programme and the European Commission's unprecedented rebuke to the Government over what it called the inflationary nature of the December Budget. The finance ministers will make a final decision on whether to issue a formal recommendation to censure Ireland.

The Commission said the 2001 Budget constituted a "major risk" to containing inflationary pressures in the Irish economy.

Meanwhile, former European Commissioner, Mr Peter Sutherland, said he was surprised by the action of the European Commission's action. Speaking to RTE's Six-One news in Davos Mr Sutherland said much of Ireland's inflation seemed to have been imported as a result of a weak euro.

"If the euro is weak, that weakness is more attributable to the continental economies than to the Irish economy which has done extremely well," he said.