Financial Structure, Technological Innovation, and Environmental Pressure in the European Union: Evidence from a PMG Panel ARDL Model

This study examines the association between financial structure components—financial access, depth, and efficiency—technological innovation, and environmental pressure in the European Union over the period 1992–2021, with the EU energy transition serving as the broader policy context. To capture the multidimensional nature of environmental pressure, a composite Environmental Pressure Index (EPI) is constructed using Principal Component Analysis (PCA), integrating indicators of air pollution, biocapacity, ecological footprint, and income-related economic activity. Employing a Pooled Mean Group (PMG) estimator within a panel ARDL framework, the results indicate that financial access is positively associated with environmental pressure in both the short and long run, whereas financial depth and financial efficiency are linked to lower environmental pressure over the long term. Technological innovation exhibits a time-varying relationship: innovation-related activities are associated with higher environmental pressure in the short run, reflecting transitional adjustment costs, but with reduced pressure in the long run as cleaner and more efficient technologies diffuse. Urbanization and population growth are also found to contribute positively to environmental pressure, pointing to persistent demographic challenges within the EU. From a policy perspective, the findings highlight the importance of aligning financial governance with the objectives of the European Green Deal by incorporating environmental efficiency considerations into credit allocation, supporting innovation-oriented investments, and promoting integrated spatial and environmental planning. Overall, the study suggests that coordinated financial development and innovation policies can contribute to mitigating environmental pressure in the European Union over time.