Italian Prime Minister Mario Draghi to Resign

Italian President Sergio Mattarella said late Thursday that he wouldn’t accept Mr. Draghi’s resignation, adding to the political uncertainty.

Some parties in Mr. Draghi’s collapsed coalition are asking him to stay on and try to form a new governing coalition, something he has previously said he wouldn’t do. What will happen next could become clearer when Mr. Draghi addresses Parliament next week.

The political crisis shows how the combination of Russia’s war on Ukraine and the jump in energy prices and cost of living are weakening political cohesion in parts of Europe, making the formation of stable governing majorities ever more difficult. French President Emmanuel Macron recently lost his parliamentary majority in an election driven by voters’ inflationary concerns. In the U.K., Prime Minister Boris Johnson resigned last week in the wake of a series of scandals, pressured by Conservative Party lawmakers who worried those scandals would compound the challenges the government faces in responding to high inflation.

Mr. Draghi has been one of the strongest voices among European leaders in favor of economic sanctions against Moscow and arms shipments to Ukraine. Mr. Draghi also argued in favor of Ukraine’s candidacy to join the European Union, a position that previously skeptical France and Germany have now also signed up to.

But he has had to deal with dissenters in his grand coalition that includes all but one of the country’s main political parties. Chief among those expressing doubts has been the 5 Star Movement, which triggered the crisis by not supporting Mr. Draghi in a parliamentary vote on Thursday.

The collapse of the coalition supporting Mr. Draghi reflects electoral opportunism by Italian politicians in a volatile party landscape but also substantive disagreements over domestic and foreign policy.

Mr. Draghi’s wide majority in Parliament means he has some leeway should he decide to try to put together a new majority. It is unclear how the eclectic group of parties in the collapsed coalition would view a second Draghi government—some 5 Star parliamentarians may decide to support him even though the party triggered the political crisis.

If Mr. Draghi sticks by his pledge not to form a new coalition, Italy’s president would then ask party leaders to see if they can cobble together a new coalition to get the country through to the next national election, which is due in the spring. If that fails, there could be a snap election after the summer, but many analysts consider that unlikely. Since becoming a republic following World War II, Italy has never held a national election in the fall because that is when Parliament must approve the annual budget.

The 5 Star Movement, a once-mighty antiestablishment party, has lost its identity and most of its voter support since joining a succession of coalition governments in the past four years. The 5 Star’s leaders are seeking to restore their populist credentials ahead of parliamentary elections that must be held within the next year, leading them to break with the broadly centrist agenda of Mr. Draghi’s cabinet.

5 Star leader Giuseppe Conte has challenged the government’s policy of sending arms to Ukraine, arguing that it impedes a diplomatic solution to the war. Mr. Conte’s stance split the party recently, with a large faction around Foreign Minister Luigi Di Maio leaving and declaring its loyalty to Mr. Draghi’s pro-Western policy on the war.

The rump of the 5 Star Movement has called for stronger government aid for Italian households hit by surging energy prices, a stance designed to appeal to lower-income voters, especially in Italy’s poorer south, who used to vote for the party.

The end of the national unity government led by Mr. Draghi could also exacerbate another long-festering crisis facing Europe: The inability of Italy’s political class to implement overhauls to the economy, which has barely grown since the early 1990s.

Italy’s lack of growth and high debt are widely seen as the biggest long-term threat to the viability of the euro. Many EU policy makers hoped that Mr. Draghi, the highly respected former president of the European Central Bank, might succeed where many other Italian leaders have failed. But Mr. Draghi’s brief time in office, lack of a mandate from voters and ideologically disparate coalition always militated against him implementing sweeping reforms.

Mr. Draghi’s coalition promised to overhaul parts of the public sector and business regulations in return for EU funding to help Italy recover from the Covid-19 pandemic. The fate of those partially enacted overhauls are now in doubt, raising fresh questions about Italy’s long-term growth prospects. The sustainability of Italy’s heavy government debt relies ultimately on Rome’s politicians forming a strong enough majority to break the country’s long reform logjam.

As the political turmoil gained steam on Thursday, it spooked investors. In a sign of the instability, the gap between yields on Italian and German benchmark government bonds widened Thursday, indicating investors want a higher payout to hold Italian debt.

Italy’s stock market fell, dragging European markets lower. The main gauge of Italian stocks, the FTSE MIB, fell 3.4%, led by losses for banks including Intesa Sanpaolo SpA, Banco BPM SpA and UniCredit SpA. The Stoxx Europe 600 fell 1.5%.

Elevated energy prices stemming from Russia’s war against Ukraine are expected to hurt consumer spending and increase credit risk for lenders, diminishing investor preference for banking stocks.

“The fact that Draghi was the prime minister was quite reassuring; he brought this kind of credibility,” said Sabrina Khanniche, a senior economist at Pictet Asset Management. “This is quite challenging. It’s adding to problems the eurozone is already facing.”

—Caitlin Ostroff contributed to this article.

Write to Eric Sylvers at eric.sylvers@wsj.com and Marcus Walker at marcus.walker@wsj.com