In which case he would have needed to annex Belgium as well, which would have guaranteed war with Britain, and probably with other powers also. OK, I know he was a dimwit, but he'd need to be certifiably insane to try that.
True but you have to put it within the context of that time, Belgium was a very young nation and only 20 years previous there were talks of her being partitioned. French and Austrian power combined like all alliances previous can make and break anything during that time. Yea Britain would have come to Belgium's aid but France could break Belgium like a toothpick with Austrian backing France and Austria receiving her like for like in return. I.e. France allies with Austria to get 1792 borders and in return, Austria can dominate Germany and when the times comes that nationalism is driving the German Rhine to be apart of the German nation we will let it become apart of Germany (only after taking advantage of the Ruhr) but Belgium area stays apart of France. You would not have a united German nation but eventually when the political time is right for politicians to pull their weight and make it happen. I think you would get a Habsburg dominated German Empire with redrawn edits according to ethnicity.
The hotspot issues with will be Alsace-Lorraine, Schleswig-Holstein, East Prussia, West Prussia and Lombardy–Venetia. If there is overwhelming consensus Alsace-Lorraine and Schleswig-Holsteinthey should be within the empire, Austria will invade because of political pressure, media or public opinion will demand it. The political solution of transferring the German population would be desirable but that is enormously complicated, whilst East Prussia and West Prussia will be drawn into the "red lines". Lombardy–Venetia will be the Habsburg compromise and will have to let it go to the Kingdom of Italy. On the other hand, it never came across their minds to try and put a Habsburg on the Italian throne.
In relation to Austria itself, she would be able to determine the borders on the German Eastern and South Eastern borders herself as she be making the partition of herself, of one part of the Austrian Empire to be inside the German Empire and another country would be created for the remaining territory. These two countries will then be connected by a personal union.
Rudolf, Crown Prince of Austria suits this scenario