The inevitable decline in the return on equity

European companies’ return on equity ( RoE ) will inevitably decline in the future 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 euro zone. This will have significant effects on the functioning of European capitalism: less use of leverage effects, less incentive for offshoring.