Advancing the circular economy in Europe: The role of eco-innovation, economic complexity, and digitalization

The global economy faces serious challenges, including resource depletion and environmental degradation, that have paved the way for the emergence of a circular economy (CE). To maintain the European Union’s (EU) leadership in CE transition, this paper examines the role of eco-innovation, economic complexity, and digitalization in advancing CE using 2010-2021 data from 22 EU member states. The Panel Ordinary Least Squares (POLS), Driscoll-Kraay Standard Error (DKSE), and Method of Moments Quantile Regression (MMQR) estimation methods are used to analyze the impact of these three factors on CE. The Dumitrescu-Hurlin panel causality test was also applied. The results show eco-innovation, economic complexity, and digitalization as significant drivers of CE, with digitalization emerging as the most influential, followed by economic complexity and eco-innovation. However, their impact differs across levels of CE performance, with eco-innovation being more effective in countries with lower CE performance, and economic complexity showing greater benefits in more advanced economies. Further analyses show causal independence between digitalization and CE, and eco-innovation and CE, but a unidirectional causality from economic complexity to CE. These findings suggest the need to strengthen country-specific and regional efforts to improve CE and enable the EU to achieve its long-term environmental and economic goals. • Digitalization, economic complexity, and eco-innovation are key drivers of the EU's transition to a circular economy (CE). • Digitalization has the strongest impact on CE advancement, followed by economic complexity and eco-innovation. • Eco-innovation benefits countries with lower CE performance, while economic complexity is more effective in advanced economies. • Tailored, country-specific strategies are crucial for enhancing CE performance across the EU.