Besides this glaring deficiency, the idea behind Google Checkout seems interesting enough to steal at least some business away from PayPal. US merchants with an AdWords account can look forward to discounted transaction fees -- for them, Google Checkout is a free service up to 10 times their spend on AdWords. It would make sense for companies matching this criteria to add Google as a payment method.
Overall, this new service does the basics and will get the job done for some merchants -- but for most it isn't an option until they can at least support international sales. This video makes it look easy enough for mom to purchase things -- a trait most Google services don't have. PayPal doesn't have much to worry about now, but once Google Checkout builds momentum it could become something impossible to ignore.