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
By the late 1770s, Joseph also faced important diplomatic obstacles in consolidating Habsburg influence in Central Europe. When the British had been Austria's allies, Austria could count on British support in its wars, but Britain was now allied with Prussia. In the Diplomatic Revolution, the French replaced the British as Austria's ally, but they were fickle, as Joseph discovered when Vergennes extricated Versailles from its obligations. Russia, which also had been an important Austrian ally for most of the Seven Years' War, sought opportunities for expansion at the expense of its weak neighbors. In 1778, that meant Poland and the Ottoman Empire, but Joseph fully understood the danger of appearing weak in Russia's eyes: Habsburg lands could be carved off easily by the cagey Catherine's diplomatic knife. Still, Frederick of Prussia was the most definite enemy, as he had been throughout the reigns of Theresa and Franz before him, when the Prussian state's emergence as a player on the European stage had occurred at Habsburg expense, first with the loss of Silesia, and later in the 1750s and 1760s. Joseph sought to unify the different portions of his realm, not the German states as a whole, and to establish Habsburg hegemony in German-speaking central Europe beginning with the partition of Bavaria.