Saudis desert the euro after series of blows
By Ambrose Evans-Pritchard in Brussels (Filed: 15/05/2004)
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.
The EU has enjoyed more success promoting the euro in Russia, where the central bank has lifted the euro share of total reserves from 10pc to 25pc 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 from 2007 onwards.
Russia has also signalled 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 Opec 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 America's remarkable freedom in living so far beyond its means on international credit. |
