Lorenzo Insigne's second-half free kick was the difference between the two sides but the Azzurrini had dominated the encounter throughout against a lacklustre England side.
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"We were awful today," he told Sky Sports. "We've got to get better than that, the players know that, I don't have to tell them that, they look at me and know exactly in their mind.
"They don't kid themselves these chaps. We give it to them blatantly when they've done well and obviously when we haven't done well we look at it and we learn the lessons by it.
"The main thing in tournament football is getting out the group. We've got two games to come and we have to win both of them."
Pearce did draw some positives from the game though, highlighting England's defensive display and the performance of debutant Nathan Redmond.
"I think the big thing is we played as badly as that and only conceded one goal to be fair. We were in the game for a very long period of time," he continued.
"The longer the game went on, I think the Italian threat was nullified a little bit by the way we changed, how high we pressed the game. We were more compact and there was less space for us to be picked off.
"Redmond's performance, considering it was the first game he played at U21 level, was very good and he was a real threat to the Italians."