Exchange rate and macroeconomic adjustment in southern eurozone countries

•Two econometric tests are applied to uncover the need to adjust the exchange rate in four Southern European countries.•We investigate the relationships between the nominal exchange rate and other macroeconomic variables.•We estimate a Penn-effect equation enlarged with net foreign assets, and address the issue of cross-sectional dependence.•We use data over a long period governed by several exchange rate regimes, including the EMS and participation in the euro.•Policy prescriptions are derived concerning the participation of the four countries in the euro.