European companies’ return on equity (RoE) will inevitably decline in the future due to four reasons. These developments will result in significant changes in the functioning of capitalism, economists at Natixis report.

What consequences of a decline in the RoE?

“The profitability of European companies, both the return on equity and the economic return on capital, will now inevitably decline due to: The need to make investments in the energy transition whose financial returns are often low; The inevitable increase in corporate taxes needed to finance redistributive policies to offset the inequality caused by the energy transition; Faster wage growth due to the upturn in wage earners’ bargaining power; The reshoring of strategic industries.”

“Given both the decline in companies’ RoE and the rise in interest rates on risk-free bonds, the corporate risk premium (the difference between the RoE and the risk-free interest rate) will normalise in the eurozone. This will have significant effects on the functioning of European capitalism: less use of leverage effects, less incentive for offshoring.”