single market in goods and services. as mentioned earlier, capital flows in catching - up economies were allocated to sectors where the marginal product of capital was low and falling, also because this was counterbalanced by rising profit margins. 6 indeed, a lack of competition led to excessive rents and distorted price signals. as a result, capital was channelled away from more productive sectors, thereby leading to lower aggregate productivity. this is also indicated by the previously mentioned firm - level analysis conducted by the eurosystem ’ s compnet, which suggests that there is strong heterogeneity of firm labour productivity within and across countries. 7 this period was also characterised by an overestimation of the sustainability of consumption and investment growth, of future productive capacity and of potential growth in the long term. more recently, in the stressed euro area countries, a lot of progress has already been achieved, with relative unit labour costs below what they were in 2008 and successful external adjustments. it is now necessary to be assured that this progress is not purely cyclically driven but structural and therefore sustainable. the reform efforts are producing some visible effects ; for instance, the current account of stressed countries in the euro area, which used to be in a significant deficit position, has now moved into surplus. further effort is also needed to implement reforms which boost productivity through an increase in the quality of human capital and a fostering of research and development. overall, these reforms should help to increase growth in the euro area,. this should also be achieved by fostering investment in the long term, boosting the quantity of investment, mobilising resources in the private sector and increasing the quality of infrastructure projects. re - establishing confidence is of the utmost importance for a sustained recovery in the euro area. we observed a strong drop in domestic private investment following the onset of the global financial crisis. this was the result not only of the credit constraints i mentioned see the article “ european banking union : foundations laid but bricks still to fall in place ”, ft 8 may 2014. see european commission, 2013, “ catching - up processes in the euro area ”, in quarterly report on the euro area, vol. 12, issue 1, march 2013. see compnet task force, 2014, “ micro - based evidence of eu competitiveness : the compnet database ”, ecb working paper series no 1634, february 2014. bis central bankers ’ speeches earlier, but also of a steep drop in confidence in the euro area

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