The boxy white and grey factory of this rainy northern town makes fewer than half the washing machines it did when Italy joined the euro. It is one of the many symbols of Southern Europe’s industrial decline.

Today, however, the Porcia plant is also a testing ground for the region’s industrial future.

Home appliance maker Electrolux, which owns the factory, wants to cut the salaries of some 5,000 workers at the plant and three other factories across Italy by up to 15 per cent over the next three years. The Swedish company says lowering labour costs is the only way its washing machines, fridges and other home appliances can compete against rival products made in eastern Europe and Asia.

The Italian government, unions and workers say any wage cut would impoverish thousands of families who rely on the plant and its suppliers.

“It’s a matter of survival,” says Annarita Licci, a 38-year-old mother of two, who moved to Porcia in 2000, the year after Europe introduced its single currency.

Then, Italy was the leading world exporter of home appliances. Now it is ranked third, far behind China, which has grabbed more than one-third of the $100 billion global market.

Like many others, the Porcia plant has progressively downsized.

Last year Licci’s partner took a company buyout. If Electrolux cuts her $1,000 salary by €130 – in line with the ballpark reduction estimated by the company – Licci says she will no longer be able to afford monthly expenses, which include a €600 mortgage.

“The company wants to lower its labour costs and starve us,” she says.

“What about investing in developing better products for this factory instead?”

The battle over Electrolux wages is at the heart of one of the most pressing dilemmas facing the battered economies of Italy and other southern European countries: The competing needs to both cut costs, and spark growth.

Companies across Europe’s southern rim struggle because wages and prices have risen higher than their products can justify. But eurozone countries can no longer depreciate their currencies to make their products cheaper in foreign markets. That leaves so-called “internal devaluation” – pushing down wages and prices – as the best way to stay competitive.

Spain, Greece and Portugal have pushed through deep wage cuts and made it easier to hire and fire, allowing firms to trim the price of their goods. This has helped Spain’s economy grow for the first time since 2011. Italy, where labour costs are still high, is flatlining.

But there are risks. A squeeze on pay could choke off already feeble consumer spending because workers have less money to spend. And as producers lower prices, it risks triggering what economists call a “deflationary spiral” in which consumers no longer buy goods, in the expectation that prices will continue to fall – a belief that creates an ever deeper recession.

“Pushing down wages is dangerous: The most worrisome consequence would be depressing consumption where there is already a demand crisis,” said Carlo Devillanova, economics professor at Milan’s Bocconi University.

Luigi Bidoia, economist and co-founder of research firm StudiaBo, says that after the mid-2000s it made little sense to keep producing in Italy. “Other countries now offer the same skills and pay at a half, a quarter, a tenth in wages,” said Bidoia.

Cutting wages is not the only way for Italy to compete. The southern economies would all benefit if Germany, the eurozone’s strongest economy, boosted its internal consumption and encouraged more imports from its neighbours. The European Central Bank could also do more to try to stimulate southern European economies, allowing inflation to rise from its current 0.8 per cent.

Pushing down wages is dangerous: The most worrisome consequence would be depressing consumption where there is already a demand crisis

So far, though, there are no signs of either happening. ECB President Mario Draghi has welcomed “relative price adjustment” – wage cuts – in Spain, Portugal and Greece.

According to the European statistics agency Eurostat, unit labour costs rose 4.2 per cent between 2000 and 2012 in Italy, against a fall of 2.8 per cent in the European Union.

The other way to compete is to produce high-value products that warrant higher prices. Italy already successfully makes high-end goods from luxury clothes to food and small electronics.

But as spending on research and development has shrivelled – Italy’s is among the lowest in the developing world – the country has steadily lost out in other areas, including home appliances.

Ernesto Ferrario, the firm’s chief executive for Italy, last month put together a proposal whereby Electrolux would not touch wages but would reduce the plant’s workforce by at most 400 people over three years. It would also guarantee some investment in exchange for a government commitment to cut some labour taxes. Officials from Renzi’s government met Electrolux management last week, but no decision was taken.