ABSTRACT:- The study analyzed CO2 emissions were affected by the underlying exchange rate mismatch in the
financial growth of European countries. In this strategy, the study combines PMG/ARDL estimators and dynamic
OLS (DOLS) estimators with ARDL bounds test to analyses a panel data from 1980 to 2022. The findings indicate
that increased trade openness and FDI in Europe are likely to lead to higher long-term real exchange rates for CO2
emissions. Fluctuations in the productivity modification and increasing human capital both raise the exchange rate,
which is a major factor in the development of CO2 emissions. Furthermore, the ARDL method’s findings indicate
that worsening misalignment in real exchange rates will slow economic growth in Europe. The economies of
Germany, Italy, Spain, and the Netherlands would benefit immediately from an influx of FDI. In contrast, in
countries like Greece, Sweden, and Hungary, the economy would be slowed down by trade openness and human
capital. The research found that avoiding real exchange rate misalignment helped allocate resources for economic
growth and cut down on carbon dioxide emissions. Other emerging countries looking to expedite their economic
growth can consider adopting a controlled floating exchange rate regime.

Keywords: Misalignment, foreign direct investment, productivity modification, trade openness, Real Exchange
Rate, ARDL model