By Cristin Sacco
WASHINGTON (MktNews) - The current account deficit remains sustainable in short term, but while market financing of the deficit "buys us time," the deficit is not sustainable for the long term, a former Federal Reserve economist said Thursday.
Catherine Mann, who served with the Fed and briefly in the Clinton White House, said that in light of exceptional productivity growth and a strong dollar, the U.S. could continue to run external deficits at or above 4% of GDP "for two or three more years."
In an update to her September 2000 analysis of the sustainability of the historically high current account deficit, Mann, now an analyst with the Washington-based Institute for International Economics, projected the dollar would weaken against the euro this year.
Mann said increased European market integration will raise demand for euro securities, thus allowing for relative dollar depreciation and the resulting improvement of the U.S. deficit.
She referred to this dollar to euro transition as a "good baton hand-off" in the "relay race" of the new global economy. The smoother the transfer, the better the chances of a win for the team, she said.
"If we all got into the new economy world, we would have a stabilizing of the current account as a share of GDP," Mann said.
She said the global catch up to the rapid U.S. growth levels in recent years contributed to the high demand for dollar investments and an inflated deficit.
Her analysis repepeated prescriptions for structural adjustments aimed at increasing private savings, providing improved education and training for American workers, and lowering trade barriers in the service sector worldwide.