The problem with that idea is that pan-Germanism (particularly with the rise of the Nazis across the border and their growing support in Austria itself) was a stronger tendency at that point
Er no, it wasn't. While it is a stereotype to say as such, in January 8, 1938, Neues Volksblatt Newspaper conducted a poll that showed around 52% of Austrian did not wish for unification with Germany and considered themselves 'Austrian' before German. The number, per other newspaper polls of the same era swung between 40% to 60% for and against the entire time but never dipped below that range, meaning that a strong plurality of Austrians remained sceptics of unification.
whereas monarchical restoration wouldn't really work as a way to regrow Austrian nationalism. After all, the Austro-Hungarian Empire was defeated in battle, which gives it a tinge of unpopularity that was amplified with the mayhem that happen during the late 1910s that led up to the First Republic.
That does not explain why, literally everyone believed that with Dolfuss's democratic referendum, everyone believed the Habsburgs would be restored. British Intelligence four days before Dolfuss died concluded that '
In all aspects, should the referendum take place legitimately without meddling as the Austrian Government wants to, then the Habsburg Dynasty will be restored in Austria without fail. The current situation in Austria lends itself extraordinarily in favor of Monarchist sentiment, which has experienced a massive upsurge after the Depression.' (pg 28 of Dolfuss und die Vaterländische Front)
French, German, Soviet, Italian and American intelligence concurred with the British in this regard.
As well, until the Austrian government-in-exile made its move IOTL, the Allies were perfectly content to treat Austria as part of Germany for the purpose of carving out occupation zones. (Not to mention that a good portion of the Austrian Resistance was actually done through the KPÖ, the Austrian Communist Party, which would probably be pretty wary of any monarchical restoration.)
The bolded is extremely and blatantly wrong. Austrian Resistance Groups IOTL:-
1. Prinz Eugen's Free Austria (Pro-Habsburg)
2. Korallenpartisanen (Neutral, had no political inclinations)
3. Styrian Erzeberg Resistance (Communist, anti-monarchist, but pro-Habsburg enough to offer citizenship and aid to Otto)
4. Salzkammergut Resistance (Nominally communist, but employed monarchists)
5. Franz Josef Messner Resistance (Catholic Conservative Resistance, ie pro-monarchist)
6. Abwehr Resistance (no political inclinations other than the liberation of Austria)
7. Antinazi Freedom Movement (no political inclinations other than catholic conservatism and constitutionalism)
8. Cartellverband (Women's Catholic Resistance)
9. Tyrolean Resistance (Pro-Habsburg, made attempts to contact Otto OTL)
10. Ostfrei (Pro-Habsburg)
11. Arnold Koster Resistance (No political inclinations)
12. The Legitimist Alliance - (Definitely pro-habsburg, name says it all. Nazi intelligence points out to ~9000 fighters involved in the Legitimist Alliance)
13.KPÖ (Anti-Monarchist - had ~6000 fighters under arms according to Nazi intelligence)
14. Carinthian Resistance (Big Tent, had no communist or monarchist consensus other than keeping the Germans and Nazis out)
15.
Österreichische Demokratische Union (Pro-Habsburg, strongly supported Otto's idea of a Free Austrian Legion)
Of course there were other resistance groups, but these were the ones that had the most influence, power and political influence in wartime Austria. Of them, in
Die Feuer in der Nacht. Opfer und Sinn des österreichischen Widerstandes by Fritz Molden, it is estimated that 25% were Communists, 25% were Monarchists, 25% were Neutrals, and 25% were Catholic Resistances.
So a monarchical restoration by Dolfusz here would basically be giving a Hapsburg restoration a perceptual tinge of fascist/Nazi influence that would not be wanted in a post-Nazi Austria, giving off the opposite effect of what was intended (even if the Hapsburgs themselves were anti-Nazi).
Not really. Otto von Habsburg was adamant that his condition for returning was democratic elections held. The problem in Austria was that the Fatherland Front had banned all the other parties so when the elections came it was either the FF or the Independents. In that case the Austrian Republic was fair, considering independents were elected rather legitimately. Dolfuss was in contact with the SPO and was ready to lift the ban on every party (barring the KPO and Austrian Nazis) due to his fear of german and/or Italian Invasion, wanting to get political unity. If the referendum goes through and Otto returns, then Otto would have summarily restored Austrian democracy (for the most part) in the process, which would only heighten his reputation.