BRUSSELS -- Saudi Arabia has abandoned its policy of diversifying foreign reserves into euros, deeming the euro zone unfit to manage a major world reserve currency.
Muhammad al-Jasser, vice-governor of the Saudi Arabian Monetary Agency, said the dollar remains the safest bet for central banks in the Middle East, despite America's trade and budget deficits. The agency is the kingdom's equivalent of the Federal Reserve.
"The euro has not yet gained a competitive status against the dollar as a major reserve currency. People are not going to switch to euros until European financial markets become more competitive, deeper, more liquid and diversified," Mr. al-Jasser said.
A spokesman for Frits Bolkestein, the European commissioner for the single market, said the criticism is harsh but true. Mr. Bolkestein has devoted much of the last five years trying to break down barriers to free capital movement, but has met with implacable resistance from vested interests.
The disenchantment of the Saudis -- who have about $200 billion in reserves and government investment funds at their disposal -- is a blow to the European Central Bank, which is keen to promote the euro as a competitor to the dollar.
Just a year ago, the Saudis seemed to be infatuated with the euro, accumulating an estimated 30 billion euros in foreign reserves between April and June 2003.
The euro was equal to $1.15 yesterday.
The euro zone has suffered a series of blows in recent months, including the collapse of the Stability Pact rules needed to curb inflationary spending.
The pact requires that euro-zone countries maintain their budget deficits at a maximum of 3 percent. France and Germany, the two largest economies of the zone, have breached the limit three years in a row, effectively suspending the pact last year.
The banking firm Morgan Stanley warned in January that the euro could disintegrate within five years as the markets begin to drive up interest rates in Italy and other heavily indebted states.
