Artificial intelligence and financial systems as enablers of the circular economy in European countries: Unlocking the strategic role of natural resources and renewable energy

The transition to a circular economy is a central component of the European sustainability agenda, aimed at reducing resource dependence, improving waste management efficiency, and fostering innovation-driven circular business models. In this context, this study examines the effects of artificial intelligence (AI), renewable energy, natural resources, human capital, and disaggregated financial system indicators on circular economy practices across European countries from 2010 to 2024. Recognizing the strong interdependencies among these countries, this study employs advanced second-generation econometric approaches that account for cross-sectional dependence and slope heterogeneity, ensuring robust and reliable estimates. The Method of Moments Quantile Regression (MMQR) results reveal several key insights. First, AI consistently enhances circular economy performance across all quantiles, indicating that its positive effect is robust and remains significant regardless of countries' initial circular economy performance levels. Second, renewable energy and human capital exert positive and significant effects across the quantile distribution of circular economy, reinforcing the importance of sustainable energy transitions and skill development in supporting circular practices. Third, financial development, markets, and institutions positively influence circular economy outcomes, although the magnitude of their effects varies across quantiles, reflecting heterogeneity in financial capacity and resource allocation. Moreover, robustness checks and endogeneity corrections, implemented through complementary methods, confirm the stability of these findings. Additionally, the Dumitrescu-Hurlin causality results reveal a unidirectional causality running from circular economy to AI and financial institutions. In contrast, bidirectional causality is observed between renewable energy and circular economy, as well as between human capital and circular economy, indicating mutual reinforcement effects. These findings underscore the importance of strengthening recycling systems, promoting clean energy adoption, and integrating circular economy considerations into financial, technological, and human capital policies to achieve sustainable and balanced growth across European countries.