The US current account deficit will last longer than talk about the euro’z breakup.

Right now the market’s focus in on Europe’s weakness (stagnant growth, no job growth, etc). Eventually, the market will focus once againt on the United States’ weaknesses (no real income growth from wages — or at least not enough to match american consumption expectations, ballooning external deficits, external not being taken out to invest in new export sectors). Neither currency zone looks particularly attractive right now.

My bet: talk about the euro breaking up will recede. The commitment of European elite to preserving existing integration is pretty fierce. Eurozone interest rates may go down, despite Trichet’s stubborness. That may prop up growth — particularly if combined with some structural reforms that focus more on freeing up the consumer and housing finance markets, not the labor market (labor market reform’s impact on domestic demand is probably negative in the short-run — see Germany).

Eventually, the fact that the eurozone is in external balance and the US is not will once again become the market’s focus. If $ stays where it is now, oil stays at 50-55, China doesn’t move (or do more than a cosmetic move), and US growth continues (i.e. the housing bubble doesn’t burst), an 8% of GDP US current account deficit in 2006 is not out of the question.

Interesting anti-spam solution too