Nominal exchange rates EUR/GRD and EUR/ITL in the context of leaving the euro zone by Greece and Italy

Aim/purpose – The aim of this paper is to present two cases of crises in Greece and Italy and to evaluate the shadow exchange rates of hypothetical new currencies (re)introduced after Grexit and Italexit. Design/methodology/approach – Both shadow exchange rates are estimated using speculative pressure index concept that emphasizes the importance of changes in foreign exchange reserves and interest rate differentials in the absence of an independent nomi- nal exchange rate. The research sample covers Greece in 1989-2020 and Italy in 1989- 2020. Findings – The research presented the estimation of shadow exchange rates EUR/GRD and EUR/ITL during the euro zone membership period. Leaving the euro area one can expect the following market rates: EUR/GRD 600 and EUR/ITL 1850. That would mean 75% depreciation and 5% appreciation to the current euro parities EUR/GRD 340.75, and EUR/ITL 1936.27, respectively. Research implications/limitations – After potential Grexit Greek authorities could expect significant nominal depreciation of a new currency (or should introduce it with a substantial discount). In the case of Italexit, the new currency would preserve its nomi- nal value. The limitations of the research methodology are: a long period of the analysis covers structural changes of financial markets, crisis events, political factors (e.g., QE programs). Originality/value/contribution – The originality of this approach lies in the combina- tion of two important economic concepts – the idea of shadow exchange rate and the index of speculative pressure. Combined together they help to prepare the methodology of shadow exchange rates evaluation for currencies that are currently in the common currency system (e.g., currency union). These results can help in economic and political discussions on effects of leaving the currency union. Keywords: nominal exchange rates, euro area, financial crises. JEL Classification: F21, F31, F37, F38, G15