This is my one blind sight in European history. The success of the Renaissance originated from the Italian city-states that had grown very large and rich. I have ideas of why Italy could be eclipsed by the rest of Western Europe, but I want to hear the current narratives. Did the warring between the cities result in an Ancient Macedonia-Greece situation? Did the Ottoman's influence over the Mediterranean play a large role?
Yet Germany was also a collection of small states, and they became a region of great industry in later centuries. What was the difference?
First, the Italian City States were very different from one another. At times Florence was doing great and at others Venice was. I bring this up to illustrate that there was no "continuity" of greatness. The Renaissance in the Italian peninsula is believed to have taken place between the 14th and 16th centuries. That is quite a gap of time. I bring it up because it will heavily define the way this question is answered and the importance of understanding what an "era" is in historical terms. It is more of a "chapter" to help us identify and imagine when things end and begin. For example, most Renaissance figures we commonly identify with lived hundreds of years apart.
With that out of the way, we can start with some of the factors that can affect a region over the course of several hundred years. In this case, we need to look at what made the Italian peninsula during the Renaissance such a powerhouse of culture and growth. We can start out with the Venetian Republic in order to address your mention of the Ottoman influence in the Mediterranean. The Ottomans are seen as the last nail in the coffin for the Venetian Republic. However, Venice was able to maintain a decent presence in the region until about the 17th Century (again, the dates come into play. when eras end and start). It was at that time, that the Cretan War took the last foreign strongholds away from Venice.
The true death of Venice as a commercial power came at the hands of something else: the discovery of the Americas. Suddenly, the spices from the east did not seem so exotic anymore. The tales of golden cities and endless riches from the new world turned the heads of most European investors. The Venetians were able to hold on to a sizable amount of trade from the East, but at that point the attention of most had been focused elsewhere. Before the Venetians could gather support from other Christian nations to maintain a hold of trade in the region. After the discovery of the Americas, it became increasingly difficult to do so.
When it comes to the wealth of the Renaissance, there is a term that is extremely important: "Conspicuous Consumption" which was coined by Thorstein Veblen. It is the acquisition of luxury goods and investment of capital in order to display power. Many statesmen and political figures of the Italian peninsula were famous for doing this. In Florence, we have the "Ospedale degli Innocenti" (hospital of the innocent) built in the 15th century. While it sounds like a great idea from our modern perspective for a state to invest towards its ill people, there was financial motives behind it. Families invested towards the construction of this hospital, with that investment came recognition. The recognition turned into admiration from the "popolo minuto" ("the little people" in other words, poor urban dwellers) and that turned into political power. The heavy investments of some of the famous figures from the era, such as the de'Medici family, came as a form to contribute to society while gaining support from the lower classes.
Now, we have touched of some of the elements that helped to create the peninsula's wealth and image for the period. But where did it go wrong? that is a hard question. In my opinion, it was a mixture of bad elements coming together. I already commented on the financial impact that the discovery of the Americas had, but the wars also came at a cost. The crippling effects of trade and financial interest being turned elsewhere changed some of the wealth flowing into the region. Now, the part that I mentioned at the beginning of greatness not always having continuity will come into play.
Countries like Spain began to make an impact in the European military stage. The discovery of the Americas brought them great wealth. Spain began to have enough power to interfere with affairs in other European territories. Charles V of Spain also began to grow impatient with the Vatican's actions and poor decisions. This led to a brutal campaign in the Italian peninsula. The Vatican was also about to face another crisis that would cripple the peninsula's social stability: the reformation. Trade was hindered due to war and war itself also plagued some of the peninsula. All this created instability which allowed some of the bigger powers such as Spain and France to start picking apart territories.
Overall, you can get an idea how conflicts over time can destabilize a region. Not just that, but to a degree each city state had a situation that has to be analyzed individually. The independence and wealth of the city states ultimately hurt them: regional warfare decreased their power and the great wealth accumulated painted a big target on them for the incoming global powers.
Some books worth reading:
*Gold & Spices: The Rise of Commerce in the Middle Ages by Jean Favier (covers the rise of the American trade industry and the last days of the Mediterranean)
*Italy in the Age of the Renaissance : 1300-1550: 1300-1550 edited by John M. Najemy. It is a nice collection of essays, some of which cover the decline of certain city states.
*Communes and Despots in Medieval and Renaissance Italy, edited by John E. Law. This one touches on some of the more controversial policies that affected the politics of the city states..some hurt more than others.
There is really a LOT more to cover here. I just touched on two of the major cities of the time. Follow-up questions are welcome.