With the exchange rate locked, the only options were faster productivity growth or lower relative wages. Italy has largely failed at the first. Labour productivity growth has been near zero since the late 1990s, far below peers.

Unit labour costs rose relative to Germany as wages outpaced meagre productivity gains. Industrial production is now roughly 23% below its 2000 level, with sharp losses in textiles, clothing and intermediate goods.

Manufacturing remains important, but much lower-end capacity that thrived on periodic devaluations has been squeezed or closed.

The result is prolonged internal devaluation, with stagnant or falling real wages containing costs. Some firms upgraded into higher-value niches and exports held up better than volumes, but workers and large parts of industry have stagnated. Without higher productivity, the euro’s rigidities continue to force adjustment onto wages rather than the currency.

For decades, Italy restored its manufacturing and export edge the old way: when inflation raised unit labor costs relative to Germany and others, it devalued the lira. The euro removed that option permanently. After 1999, the only remaining path was higher productivity through better processes, technology, skills, or scale. Many firms, especially smaller ones in traditional manufacturing, never made that leap.

Firms that could not raise productivity fast enough lost markets, cut capacity, or closed.

The result was lower industrial output and persistently high structural unemployment. Youth joblessness spiked above 40% in the mid-2010s and remains around 20%. For those still employed, real wages stagnated for decades.

The euro wasn’t the sole cause; Italy entered with structural productivity, governance, and demographic challenges, but it removed the safety valve that had papered over the gaps.