with a gradually increasing scope. the first comprehensive eu free trade agreement ( fta ) with an asian partner ( south korea ) has been in force since 2011, rendering 70 % of bilateral trade duty - free. at the end of 2012, the eu and singapore concluded a comprehensive fta, the first eu agreement with an asean country covering trade and services. talks on investment are on - going. fta negotiations with japan began in april 2013, while talks on a comprehensive investment agreement with china started in january this year. the stronger links between asia and europe which i just mentioned have deepened the interdependency of the two areas. the imf estimates that a – 1 % growth shock in emerging markets would have a negative impact on euro area output of – 0. 3 %. 1 internal estimates suggest that a shock of that size in china alone would bring down gdp in the euro world economic outlook, april 2013, chapter 2. bis central bankers ’ speeches area by 0. 1 – 0. 2 %. 2 however, these impacts could be larger if the shock was accompanied by confidence effects, a rise in global risk aversion and capital flow reversals since the financial crisis, growth in emerging markets has come down considerably, currently standing at about 4 % as compared with over 6 % in the period 2000 – 07. china has experienced one of the largest drops in its growth rate, from over 10 % before 2008 to 7. 7 % last year. external factors such as lower demand from advanced economies and tighter global financial conditions can probably explain a good part of this growth deceleration. however, the question remains whether we might not be witnessing a more structural change in asia ’ s growth potential. i would like to focus briefly on some examples concerning emerging asia ’ s two largest economies, china and india. in china, demographic developments and declining returns on very high investment in a number of heavy industries are likely to be behind some of the recent growth deceleration. in addition, high credit growth and increased leverage since 2008 has led to very high corporate debt, increasing risks in the financial system. it is clear that china ’ s new government is implementing a far - reaching programme of structural reforms, including in the financial sector. for instance, china has already made significant progress in liberalising interest rates. formally, only bank deposit rates are still controlled directly by authorities. but de facto liberalisation has progressed even further as non - bank institutions have recently offered consumers alternatives, for instance in

that have loosened the ties between lenders and borrowers. securitisation, which has enabled lenders to spread risk better, restructuring it and selling it to others, has however reduced the incentive to value it correctly, either by those who originated the product or those who acquired it. the sub - prime mortgages in the united states are an example of how certain risks can be underestimated if they are sold on to others, perhaps with opaque contracts. the loss of trust in certain kinds of financial contract, in particular in relation to their liquidity, has reduced the incentive to finance such operations, giving rise to chain reactions in all the markets. in this case too, the alarm was raised some time ago. i recall, for instance, a financial times article at the end of january 2007, six months before the start of the turbulence, which quoted a comment made by the president of the ecb at davos, namely that international markets were underestimating risks and had to prepare for a substantial adjustment in the prices of financial assets. the response of the market operators to these warnings, in particular from the other side of the atlantic, was : “ we ’ ll keep dancing until the music stops ”. one should not interfere with the market mechanism or lean against asset prices. financial innovation, also in mortgage markets, was a positive development as it allowed households, also the less well - off, to finance consumption and investment. not everybody shared this position. as early as february 2005, paul volcker, former chairman of the federal reserve had drawn attention to the imbalances in the us economy, ranging from the balance of payments deficit and the possible bubble in house prices to the excessive household indebtedness. in his view, a correction of these imbalances was inevitable. the third imbalance is the one that results from globalisation and from the escape from poverty of hundreds of millions of people, notably in china, india and elsewhere in asia as well as in africa, a change which is putting pressure on energy and agricultural commodity prices. the imbalance between growth in global demand and rigidity of supply points to scarcities that are reflected in prices. the uncertainties of the financial markets have in the end contributed to price tensions. also in this instance, the alarm was raised some time ago, although little notice was taken. the price of oil, for example, was around usd 20 a barrel in 1999 and in the eight years thereafter it rose fivefold (