It is argued that in the knowledge economy and in the context of the current restrictions on public finance, matching the output of higher education with the needs of the labour market is not simply one of many key issues for policy makers addressing the sustainability of higher education: it is "the" issue. As the sources of funding for universities are almost entirely domestic and, in most countries, primarily governmental, politicians are expected to ensure that increasing public investment in higher education is justified in terms of the benefits accruing to the domestic workforce and investors. In so doing, they must avoid disrupting the international, free community of scholars and students engaged in the pursuit of knowledge and, thus, destroying the historical source of wealth creation that academia represents. This article considers the current debate in Europe and recent research on the interactions between universities and labour markets. The reform of university governance in Italy, regarded as much-needed and overdue, is evaluated in this context; and the assumptions on which such reform might be based, and the potential for aligning higher education more closely to the labour market, are examined.