Driving the circular economy in the European Union: Public environmental expenditure, private sector investment, and their synergy.

Abstract

The European Green Deal and the Circular Economy Action Plan underscore the European Union's (EU) commitment to transforming from a "take-make-dispose" linear model to an environmentally friendly circular economy (CE). Achieving this transition requires both public and private sector initiatives, with government environmental protection expenditure (GEPE) and private investment in CE-related sectors (PICE) recognized as central drivers. However, whether these investments act as complements or substitutes in fostering the CE has received limited scholarly attention. This study addresses this gap. Grounded in theories of externalities, public-private investment complementarity, and the resource-based view, we investigate the independent and joint effects of GEPE and PICE on CE development across 27 EU countries from 2010 to 2022. We apply a two-step econometric approach. First, we construct a composite CE index using principal component analysis (PCA) based on five key CE indicators. Second, we analyze the effects of GEPE and PICE on CE development using several panel regression models, including pooled OLS, panel-corrected standard errors, and feasible generalized least squares, with Driscoll-Kraay standard errors used as a robustness check. The results reveal that GEPE and PICE individually promote CE. More importantly, their interaction generates a positive synergistic effect, providing evidence of a crowding-in relationship between public expenditure and private investment. These findings suggest the complementarity of public expenditure and private investments in CE transitions and offer policy-relevant insights for achieving the EU's sustainability and climate goals.