This study delves into the relationships within the circular economy framework in Europe, focusing on key variables such as investment, circular material use, and income. Initially, Pearson’s correlation coefficient was applied, revealing significant and strong associations among the variables for most countries. To ensure robust conclusions, the study employed panel econometric methods for the 27 EU member countries from 2010 to 2021. Due to cross-sectional dependence in the dataset, the Westerlund cointegration test (a second-generation method) was utilized, confirming long-term relationships among investment, circular material use, and income within the EU’s circular economy. This result was supported by the Johansen-Fisher cointegration test (a first-generation method), which identified three cointegrating equations in the model. The PMG-ARDL model estimation indicated long-term interconnections among the variables. In the long run, income is positively influenced by both investment and the use of circular materials. Likewise, investment is primarily influenced by income levels within the circular economy and also promotes the use of circular materials (as input sources). However, the use of circular materials (as consumption sources) decreases as income levels rise within the circular economy. By designing and implementing supportive policies, such as tax incentives, grants, and subsidies for circular economy initiatives, policymakers can stimulate economic growth while ensuring sustainability.