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Search for allies, and war between Austria and Prussia

In the winter and spring of 1864, when the German Confederation invaded and occupied the German-speaking duchies ruled by Denmark (Schleswig and Holstein), Napoleon III recognized the threat that a unified Germany would pose to France, and he looked for allies to challenge Germany, without success.

The British government was suspicious that Napoleon wanted to take over Belgium and Luxembourg, felt secure with its powerful navy, and did not want any military engagements on the European continent at the side of the French.

The Russian government was also suspicious of Napoleon, who it believed had encouraged Polish nationalists to rebel against Russian rule in 1863. Bismarck and Prussia, on the other hand, had offered assistance to Russia to help crush the Polish patriots.

In October 1865, Napoleon had a cordial meeting with Bismarck at Biarritz. They discussed Venetia, Austria's remaining province in Italy. Bismarck told Napoleon that Prussia had no secret arrangement to give Venetia to Italy, and Napoleon assured him in turn that France had no secret understanding with Austria. Bismarck hinted vaguely that, in the event of a war between Austria and Prussia, French neutrality would be rewarded with some sort of territory as a compensation. Napoleon III had Luxembourg in mind.

In 1866, relations between Austria and Prussia worsened and Bismarck demanded the expulsion of Austria from the German Confederation. Napoleon and his foreign minister, Drouyn de Lhuys, expected a long war and an eventual Austrian victory. Napoleon III felt he could extract a price from both Prussia and Austria for French neutrality. On 12 June 1866, France signed a secret treaty with Austria, guaranteeing French neutrality in a Prussian-Austrian war. In exchange, in the event of an Austrian victory, Austria would give Venetia to France and would also create a new independent German state on the Rhine, which would become an ally of France. At the same time, Napoleon proposed a secret treaty with Bismarck, promising that France would remain neutral in a war between Austria and Prussia. In the event of a Prussian victory, France would recognize Prussia's annexation of smaller German states, and France, in exchange, would receive a portion of German territory, the Palatinate region north of Alsace. Bismarck, rightly confident of success due to the modernization of the Prussian Army, summarily rejected Napoleon's offer.

On 15 June, the Prussian Army invaded Saxony, an ally of Austria. On 2 July, Austria asked Napoleon to arrange an armistice between Italy, which had allied itself with Prussia, and Austria, in exchange for which France would receive Venetia. But on 3 July, the Prussian army crushed the Austrian army at the Battle of Königgrätz in Bohemia. The way to Vienna was open for the Prussians, and Austria asked for an armistice. The armistice was signed on 22 July; Prussia annexed the Kingdom of Hanover, the Electorate of Hesse, the Duchy of Nassau and the Free City of Frankfurt, with a combined population of four million people.

The Austrian defeat was followed by a new crisis in the health of Napoleon III. Marshal Canrobert, who saw him on 28 July, wrote that the Emperor "was pitiful to see. He could barely sit up in his armchair, and his drawn face expressed at the same time moral anguish and physical pain.