Expanded from an earlier answer

It used to be axiomatic in historical scholarship to assume that the Austro-Hungarian empire was doomed to collapse. This was partly the result of the empire's ignominious dissolution and the various successor states of the empire being based upon the ethnic nation-state paradigm. The widespread notion in mid-twentieth-century historiography that the nation-state was the natural evolution of modernity also buttressed this pessimistic view of the Habsburgs' fortunes. Both of these contentions have been put under increased scrutiny in the past few years. For example, neither India nor Indonesia seem to be heading towards imminent ethnic dissolution despite the absence of an overarching ethnic plurality. Furthermore, when examining the Austro-Hungarian society and culture more closely, nationalist irridentism was much less popular and less of a given than the success of the ethnic-based successor states would suggest. This does not mean that the Habsburg empire was on solid ground and the national issue a toothless one. The general gist from current historiography is that the nationalist issue posed a set of intractable problems for the Habsburgs, it was not intrinsically fatal to the dual monarchy.

Most mainstream nationalist partisans argued that they were Kaisertreue (loyal to the empire/emperor) and couched their demands for more autonomy as part of this personal relationship between ruler and ruled. Vienna for its part was reluctant to grant concessions to national minorities post-Ausgleich, but it was also unwilling to use force to repress undesirable ethnicities. Such reluctance to use force possessed both domestic and international rationales to it. On the domestic front, the Habsburg's reputation as easy-going and fair dynasty was a means to counter excessive Magyarization that the Ausgleich had allowed to take place. On an international front, ethnic groups often transected imperial borders and in the immediate decades prior to 1914 each of the multi-ethnic empires feared that the other would play the ethnic card to destabilize their neighbor. Here the easy-going stratagem differentiated the Hapsburgs from their Russian and German imperial neighbors who actively suppressed their Polish populations. In contrast, the Polish population in Austrian Galicia was able to engage in cultural activity with relatively minimal state interference. Yet Vienna was only willing to countenance ethnic activism and calls for autonomy to a certain level. Actual concessions to these groups by the empire were relatively rare and the Habsburg's assertions that they were above the fray of inter-ethnic political squabbles hamstrung any constructive attempt to resolve this thorny issue. This was clear in the case of Bohemia. Although Czech activists had gradually assumed control over most of the region's political organs by the twentieth century, the persistence of the German minority in Prague and the Sudeten region made ethnic tensions quite tense in the crownlands. These tensions made it much harder for the Habsburgs to employ the various methods of imperial legitimization such as a Bohemian coronation as many of these historical symbols had been politicized by domestic conflicts. By portraying the dynasty as the ultimate force for balance and order between the various ethnicities, the Habsburgs found that this greatly restricted their options in domestic politics.

Nor do Habsburgists argue that nationalist politics within the empire was as an energetic and centrifugal force as in prior scholarship. Nationalist activists often had to contend with apathy and indifference among their own ethnic cohorts and the existence of "national amphibians," individuals who could easily switch between ethnic identities, was especially troubling to these activists. Looking beyond nationalist broadsheets and into the various internal memoranda of nationalist organizations, most of these activists were quite concerned with the degree of apathy and opportunism among their ethnic population. Here Kaisertreu sentiments were often used against political opponents, most notable between German and Czech activists in Bohemia, both of which claimed to be the Kaiser's most loyal subjects as a way to co-opt the popular and historical traditions of the Habsburgs.

The Habsburgs had a number of novel and traditional stratagems for dealing with the nationalities issue by the late-nineteenth and early twentieth centuries. One technique was to was for Vienna to simply ignore the reality of the its polyglot empire and do nothing to rock the boat. This led to a curious phenomena in which the Dual Monarchy refused to name train stations because that would imply it favored one language over the other. Far more productive was for the Habsburgs to build upon traditional forms of loyalty, but with the trappings of modernity. The visage of the Emperor became quite prominent in mass media and other forms of mass consumption and imperial events became opportunities for parades and other celebrations. Traditional avenues for dynastic loyalism like the veterans' organizations became revived and received new attention from the state as a way to build up an imperial loyalism that was supranational. The Habsburgs' reputation as a fair and impartial dynasty, which was often a major feature in this new imperial media, also helped to win followers in the modern age. Austrian and Bohemian Jews in particular were quite drawn to expressions of Kaisertreue sentiments given the rising political antisemitism of movements like Karl Lueger's Christian-Socials. For a number of the empire's subjects, the Habsburgs symbolized both stability and prosperity while nationalist activism promised an uncertain future.

But these attempts to rehabilitate the rehabilitate the empire went only so far. One of the problems with both the Ausgleich and Habsburg neutralism over the ethnic issue was that it inhibited the Habsburgs from fully mobilizing the resources of the empire. Although the Habsburg military was in many ways a modern and novel institution, the state lacked the resources to make its military competitive to its rivals. The First World War exposed many of these defects of the Habsburgs' deficient and perpetually understaffed state organization. Although the military performed better in some areas, most notably the Italian front, a large-scale total industrial war was not something that the empire could easily bear. Wartime attrition frittered away one of the cornerstones of Habsburg loyalism, the army, and it the economy went into a state of collapse. This further damaged imperial prestige as the Emperor was deluged with petitions to alleviate the hardships of his subjects, but was impotent to stop them. This floundering of the imperial state provided an important wedge issue for various nationalist activists such as Masaryk, many of whom now enjoyed the patronage of the Entente powers. Such support from a great power for national irridentism was atypical during peacetime since most of these states feared that encouraging ethnic particularism of their neighbors would have dire consequences for their own national minorities. As the war evolved, it became increasingly clear to Franz Joseph that the war was an all-or-nothing affair for his dynasty. The advanced age of Franz Joseph, a boon during peacetime since he could project an aura of grandfatherly concern, became counterproductive during a wartime milieu. The escalating crisis with Italy pushed Franz Joseph to his breaking point, Ferdinand Freiherr von Marterer's diary recorded the Emperor exclaiming after Italy had delivered its ultimatum that "In this way shall we go under," and weeping in the ante-chamber of the palace. Von Marterer would also note that after the Italian entry, that "The Emperor frequently nods off during reports, we are lacking the strong central force, uniform action everywhere."

Yet these problems of state organization and dynastic loyalism were far from unique in the context of the First World war. Both the Hohenzollerns and the Romanovs found themselves increasingly sidelined and impotent during the war, and both dynasties were rather unceremoniously deposed in 1917 and 1918. The Ottoman Empire possessed a supranational identity par excellence, Islam, but it could not translate this into a wide scale imperial mobilization during the war and many of the complaints of civilian hardship in Palestine and Syria echoed similiar complaints directed towards the Habsburgs. The pressures of war heightened the ethnic tensions within many of the multiethnic empires of the combatants and defeat transformed preexisting ethnic fractures into wide fissures.

Sources

Cole, Laurence, and Daniel L. Unowsky. The Limits of Loyalty: Imperial Symbolism, Popular Allegiances, and State Patriotism in the Late Habsburg Monarchy. New York: Berghahn Books, 2007.

Healy, Maureen. Vienna and the Fall of the Habsburg Empire: Total War and Everyday Life in World War I. Cambridge: Cambridge University Press, 2004.

Judson, Pieter M. Guardians of the Nation: Activists on the Language Frontiers of Imperial Austria. Cambridge, Mass: Harvard University Press, 2006.

King, Jeremy. Budweisers into Czechs and Germans: A Local History of Bohemian Politics, 1848-1948. Princeton, N.J.: Princeton University Press, 2002.

Rauchensteiner, Manfried. The First World War and the End of the Habsburg Monarchy, 1914 - 1918. Vienna: Böhlau, 2014.

Wolff, Larry. The Idea of Galicia: History and Fantasy in Habsburg Political Culture. Stanford, Calif: Stanford University Press, 2010.