November 7, 1866 -
The Habsburg's vast multinational empire was drawing its final breath. The family had ruled as monarchs since 1282, dominating Central Europe for centuries. Six hundred years later, Austrian, Sudeten, and Siebenbürger Saxons accounted for just a quarter of the population of the ten different ethnic groups living in the huge territory that covered much of Central Europe. Nationalist pressures within her borders plus German and Italian aspirations triggered the Habsburg downfall.
In better days, the Austrian emperor led the German-speaking peoples through the thousand-year-old Holy Roman Empire and then later as the president of the Rhine Confederation. But the rising influence of Prussia dominated the successor Deutscher Bund (the German Confederation), causing tension. Consequently, the spirit of the Holy German Empire had long-since disappeared. It was to be replaced by sectarian struggles between the Protestant "Iron Chancellor" Otto von Bismarck and the Catholic Habsburgs. As the architect of a German customs union under the Zollverein policy, Bismarck sought no political interference of Catholic Austria; however, scientific, cultural and economic ties remained strong. The final blow to Habsburg rule came from Deutscher Dualismus, the intensifying rivalry between Austria and Prussia for the domination of the German states. The climax to this struggle was the Seven Weeks War that pitted Austria against the largest alliance since the fall of Napoleon: the Kingdom of Prussia, various allies within the German Confederation, and the recently unified Kingdom of Italy.
Although Italy gained territory in the south, the key result was that the majority German-speaking region, including a chunk of Bohemia and pro-Imperial Slovenia, were brought under Prussian hegemony as the German Kingdom of Austria. This was ruled by the Prince Rudolf Habsburg, a much weaker figure than his father, the recently deposed Emperor Franz Joseph. Lichtenstein, which had been under Austrian protection, also joined with the Germans. After the defeat of France, these territories would merge to form the Second German Reich that was proclaimed at the Palace of Versailles. This ethnically unified polity only excluded Swiss Germans who had been independent from the Holy Roman-Germanic Empire after the Swabian war and formalized by the Treaty of Westphalia.
The creation of the new powerful German state was a major challenge for the British whose primary foreign policy goal was to prevent continental domination by one Great Power. Had the late Prince Albert of Saxe-Coburg and Gotha survived, then perhaps Great Britain would have been more directly involved much earlier. Fortunately, the immense difficulties in consolidating the new territories with the states of the former German Confederation, and the tiny size of the Austrian Navy, were a constraint upon further expansion. Certainly they prevented the Reich from investing resources in colonial empire-building. Britain and Germany watched each other warily from the sides of their eyes and yet without clashing points or disputed areas there was no immediate threat of war breaking out.
The royal architect of German unification, Kaiser Wilhelm I, passed in 1888. His death ushered in the steady rule of Kaiser Frederick III, husband of Victoria, Princess Royal. Bismarck stepped down as Iron Chancellor, opening the way to democratic and social reforms. Intense diplomatic efforts were made to build a friendlier relationship, based upon neutrality, around agreed spheres of influence with Great Britain. The wise decision to return the province of Lorraine to France further reduced the tension in Europe.
Many royal heads attended the funeral of "Good Emperor Fritz" when he passed in 1905, but storm clouds were already gathering. He was to be replaced by his eldest son, Wilhelm II, an unstable individual who entertained dreams of a bellicose "New Course" to cement German status as a leading world power.
Author's Note:
In reality, the major result of the Seven Weeks War was a shift in power among the German states away from Austrian and towards Prussian hegemony. It resulted in the abolition of the German Confederation and its partial replacement by the unification of all of the northern German states in the North German Confederation that excluded Austria and the other Southern German states, a Kleindeutsches Reich. The war also resulted in the Italian annexation of the Austrian province of Venetia.
A further OTL consequence of von Beust's desire for revenge, was The Austro-Hungarian Compromise of 1867 which established the dual monarchy of Austria-Hungary.