The nexus of financialization and circularity: Evidence from European economies

Abstract

This article is the first to study a nexus between financialization and circularity performance in the European region. To reflect the circularity performance, we use six different measures, including the amount of municipal waste, the number of circularity patents, the amount of circular material used, the rate of recycling waste, the rate of recycling biowaste, and the rate of recycling e-waste. By using various econometric techniques (namely a panel-corrected standard errors [PCSE] model, a feasible generalized least square estimates [FGLS] model, and the two-step General Method of Moment [the two-step GMM), our study indicates that financialization is an enabler for circularity. However, these results are only statistically significant for the financial institution's development, while the financial market has a positive yet insignificant impact on circularity performance. The development of the financial institution is reported to increase municipal waste and the amount of recycling biowaste and e-waste, thus promoting the path toward the circular economy. To shed light on the financialization-circularity nexus, we use the different dimensions of financialization dynamics and report heterogeneous influences on the different issues of circularity performance. Furthermore, the results from the dynamic fixed effects (DFE) in the autoregressive distributed lag (ARDL) method suggest that the impact of financial development only becomes apparent in the long term.