Austro-Italian ironclad arms race
Austria's defeat in the Seven Weeks War forced Austria to determine a new set of foreign and domestic policies for the future, as Austria's interests since the days of the Holy Roman Empire had primarily been found in Italy and Germany. The Empire thus reformed itself into the Austria-Hungarian Empire following the adoption of the Austro-Hungarian Compromise of 1867 (German: "Ausgleich"), which re-established the sovereignty of the Kingdom of Hungary and placed Hungarians within the Empire on an equal footing with Austrians. Under the "Ausgleich", Emperor Franz Joseph I would be crowned as King of Hungary, while a separate parliament at Pest with powers to enact laws for the lands of the Holy Crown of Hungary would be established.
Archduke Albrecht, Duke of Teschen
At the outbreak of the Seven Weeks' War in June 1866, Albrecht was named commander of the southern army facing the Italian forces of King Victor Emmanuel II. Albrecht was decisively victorious in the battle of Custoza (24 June 1866), but failed to exploit his victory when he neglected to pursue the beaten Italian "Army of the Mincio". Any advantages for the Austrians however were canceled out by the crushing defeat on 3 July at Königgrätz, where Ludwig von Benedek was surprised by the speed of Helmuth von Moltke's concentric advance into Bohemia.