Riyadh scraps euro foreign reserves policy

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.

The euro accounts for 13 percent of total foreign reserves, compared to 68 percent for the dollar, according to International Monetary Fund data.

The European Union has enjoyed more success promoting the euro in Russia, where the central bank has upped the euro share of total reserves from 10 percent to 25 percent since early 2002.

Euro deposits in private banks have been exploding, a phenomenon that is likely to increase as Poland and the Baltic states join the euro in 2007.

Russia has also signaled that it intends to price its oil and gas exports in euros. The move is part of a deal between Russian President Vladimir Putin and German Chancellor Gerhard Schroeder aimed at challenging American global dominance.

Iran has been pushing for a similar switch to euro invoicing for Middle East oil exports, but Saudi Arabia has used its controlling influence over the Organization of Petroleum Exporting Countries as the world's number one producer to quash the idea.

It is unclear whether it would make any difference to the long-term price of oil if producers started billing in euros, but a switch would influence strategic psychology and could constrain the United States' remarkable ability to live beyond its means on international credit.