There is a widespread consensus that the slow productivity dynamics of the peripheral countries is the main cause (together with high growth of labour costs) of loss of competitiveness, resulting in increasing intra-European trade imbalances. Productivity growth becomes therefore a central target of European economic policy, with the aim to strengthen the competitiveness of a country and stimulate its economic growth. This interpretation gives the rationale for national and European guidelines and structural reforms aimed at promoting greater flexibility in the labour market and the alignment of wage growth to productivity growth. Starting from a different theoretical framework, which interprets economic growth as limited by aggregate demand, this paper analyses the impact of labour market reforms in Italy and makes a comparison with Germany. It is argued that the reforms implemented in Italy since the 90’s have led to changes in the models of production and labour organization, which have contributed, along with the stagnation of aggregate demand, to slower the growth of labour productivity. A panel data analysis at the sectoral level, grounded on Paolo Sylos Labini’s productivity equation, is developed by focusing on the effects of wage moderation and labour flexibility on the productivity of labour in Italy and Germany. The results bring empirical evidences that lower wage growth and higher external flexibility negatively affect labour productivity’s performance in both countries. Consequently, the evidence of a significant negative effect on labour productivity, in addition to the recognised weak effect on employment dynamics, raises doubts on the adequacy of the deregulation of labour market as means to foster growth, productivity and employment. This leaves room for looking for different policy measures aimed at promoting greater and more stable employment and higher economic growth.