Financial Development, Digitalization, and Energy Intensity in the European Union: Suggestive Evidence of a Conditional Association

This study examines whether the relationship between financial development and energy intensity in the European Union depends on the level of digitalization. Using a balanced panel of 27 EU member states over the period 2007–2019, we estimate two-way fixed effects models with Driscoll–Kraay standard errors and an interaction term between financial development and digitalization. The results indicate that financial development alone is not meaningfully associated with within-country variation in energy intensity. By contrast, its interaction with digitalization is negatively associated with energy intensity under the preferred Driscoll–Kraay specification, indicating that the estimated association between financial development and energy intensity becomes more negative as digitalization rises. The interaction provides the largest incremental increase in within-R2 among the sequential specifications, although the absolute improvement is modest (Δ within-R2 = 0.016) and its statistical significance is sensitive to country-clustered inference and country-specific linear trend controls. Renewable energy provides limited additional explanatory power without altering the main relationship. Overall, these results are best interpreted as suggestive rather than definitive evidence of a conditional association, underscoring the importance of considering digitalization when assessing the relationship between financial development and energy intensity.