states may have been broken, but the war also splintered the spirit of pan-German unity, as many German states resented Prussian power politics. Unified Italy and Austro-Hungarian Compromise The Peace of Prague offered lenient terms to Austria but its relationship with the new nation-state of Italy underwent major restructuring. Although the Austrians were far more successful in the military field against Italian troops, the monarchy lost the important province of Venetia. The Habsburgs ceded Venetia to France, which then formally transferred control to Italy. The end of Austrian dominance of the German states shifted Austria's attention to the Balkans. The reality of defeat for Austria also caused a reevaluation of internal divisions, local autonomy, and liberalism. In 1867, the Austrian emperor Franz Joseph accepted a settlement (the Austro-Hungarian Compromise of 1867) in which he gave his Hungarian holdings equal status with his Austrian domains, creating the Dual Monarchy of Austria-Hungary. War with France The French public resented the Prussian victory and demanded Revanche pour Sadová ("Revenge for Sadova"), illustrating anti-Prussian sentiment in France—a problem that would accelerate in the months leading up to the Franco-Prussian War. The Austro-Prussian War also damaged relations with the French government. At a meeting in Biarritz in September 1865 with Napoleon III, Bismarck had let it be understood (or Napoleon had thought he understood) that France might annex parts of Belgium and Luxembourg in exchange for its neutrality in the war. These annexations did not happen, resulting in animosity from Napoleon towards Bismarck. Background By 1870 three of the important lessons of the Austro-Prussian war had become apparent. The first lesson was that, through force of arms, a powerful state could challenge the old alliances and spheres of influence established in 1815. Second, through diplomatic maneuvering, a skilful leader could create an environment in which a rival state would declare war first, thus forcing states allied with the "victim" of external aggression to come to the leader's aid. Finally, as Prussian military capacity far exceeded that of Austria, Prussia was clearly the only state within the Confederation (or among the German states generally) capable of protecting all of them from potential interference or aggression. In 1866, most mid-sized German states had opposed Prussia, but by 1870 these states had been coerced and coaxed into mutually protective alliances with Prussia. If a European state declared war on one of their members, then they all would come