THE OTHER ARAB STREET

Saudis desert the euro after series of blows (Ambrose Evans-Pritchard, Daily Telegraph, May 15, 2004)

Saudi Arabia has abandoned its policy of diversifying foreign reserves into euros, deeming the eurozone unfit to manage a major world reserve currency.

Muhammad Al-Jasser, the deputy chief of Saudi Arabia's monetary agency, said the dollar remained the safest bet for central banks in the Middle East, despite America's trade and budget deficits. "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," he said.

A spokesman for Frits Bolkestein, the European single market commissioner, 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 $200billion 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 in foreign reserves between April and June 2003. But the eurozone has suffered a series of blows in recent months, including the collapse of the Stability Pact rules needed to curb inflationary spending.

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 13pc of total foreign reserves, compared to 68pc for the dollar, according to IMF data.