Both sentences are grammatically correct, but they have slightly different meanings. “I like watching Italy matches with my friends” means that you enjoy watching any match that involves the Italian team, regardless of whether they are playing against another team or not. “I like watching Italy’s matches with my friends” means that you enjoy watching matches in which the Italian team is playing against another team. If you are referring to the Italian national football team, you might want to use the second sentence. However, if you are talking about any match that involves an Italian team, you can use the first sentence.