The impact of circular economy on economic growth in Western and Eastern Europe

Governments and international organizations increasingly promote sustainable, inclusive economic growth through the application of circular economy principles in production and consumption to address resource depletion, waste generation, and environmental impacts. This study aims to evaluate the relationship between circular economy indicators and short-run economic growth in European Union (EU) countries over the period 2004–2023, with particular emphasis on regional heterogeneity between Western and Eastern Member States. The analysis is based on a panel of 27 EU countries and employs a combination of fixed-effects (LSDV) models and a dynamic two-step Generalized Method of Moments (GMM) estimator to address unobserved heterogeneity, growth persistence, and potential endogeneity. The empirical model relates GDP per capita growth to key circular economy dimensions, including packaging waste generation, municipal waste recycling, environmental tax revenues, resource productivity, and circular economy–related innovation, alongside relevant control variables. The results indicate that the growth effects of circular economy indicators are transmission-channel specific. Packaging waste generation exhibits a positive but weakly significant association with short-run growth, reflecting the persistence of scale-driven expansion. In contrast, resource productivity and environmental taxation display strong and statistically significant positive effects in the dynamic specification, suggesting that efficiency improvements and well-designed fiscal instruments can enhance short-run economic performance. Circular economy–related innovation shows a negative and significant short-run effect, suggesting transitional adjustment costs and time lags between investment and realized productivity gains, while recycling does not exert a statistically significant short-run impact. Fixed-effects estimates reveal substantial regional heterogeneity across Western and Eastern EU countries. These findings imply that circular economy policies should be productivity-oriented, fiscally integrated, and development-stage sensitive. Environmental tax revenues should be reinvested through structured revenue-recycling schemes to support efficiency-enhancing technologies and industrial modernization. Innovation policies require stable, long-term financing and risk-sharing mechanisms to mitigate transitional growth slowdowns. Furthermore, less advanced Member States may require differentiated transition support to reduce short-run adjustment costs and ensure balanced economic convergence within the EU.