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.
War of the Bavarian Succession
Count Karl-Wilhelm Finck von Finckenstein, Frederick the Great's prime minister, believed that any Austrian acquisition in Bavaria would shift the balance of power in the Holy Roman Empire, diminishing Prussia's influence. Prussia's recent gains had been hard-won: thirty years earlier, Frederick had engaged in protracted wars in Silesia and Bohemia, resulting in Prussia's annexation of most of Silesia, and now, with the economy and society modernizing under his direction, Prussia was emerging as a world power. In the Silesian Wars and the Seven Years' War, Frederick had earned a new, if grudging, respect for his kingdom's military and diplomatic prowess from the European powers of France, Russia, Britain and Austria. To protect Prussia's status and territory, Finck and Frederick constructed an alliance with the Electorate of Saxony, ostensibly to defend the rights of Charles II August, Duke of Zweibrücken.