In this timeline, the German Empire is not stuck with an ultra-reactionary overpowered chancellor for two decades after its unification, thus the political and diplomatic development takes a different turn.
Events leading up to PoD
After a series of quick wars in the 1860's and a final war against France in 1870, the German Empire was founded on January 18, 1871 in Versailles, France. Under the guidance of the "iron chancellor" Otto von Bismarck, a staunchly reactionary power-hungry political genius, the new Empire was given a constitution which made the chancellor the most powerful position, while the parliament was diminished to a mere tool used to justify the chancellor's actions through popular backing. During the first decade of the Empire, Bismarck single handedly destroyed the liberal party by forcing it to ally with him and thus commit treason to its core beliefs, while he was at the same time waging war on the Catholic minority and later also on the social-democratic laborer's party. In diplomatic terms, Bismarck tried to prevent further wars by entangling Germany and its neighbours in an intricate web of alliances and securities while escalating conflicts on the peripheries of Europe to steer them away from Germany.
Synopsis of OTL
The old Emperor Wilhelm I. lived to his 90s, thus preventing his liberal-minded, anglophile son Friedrich from rising to power. Bismarck's internal policies destroyed the German party system and cemented the non-democratic constitution. When the diplomatic web of treaties became more and more entangled, Germany lost its traditional dynastic bonds to Russia and thus had to lean on the weak Austrian monarchy for protection. When old Kaiser Wilhelm I. died in 1888, his liberal son Friedrich only outlived him for some 90 days. The new Emperor Wilhelm II did dispose of Bismarck, but pursued a very arrogant diplomatic course and thus alienated Britain even further. With the Great War of 1914, Germany fought at the side of Austria against almost all its neighbors and finally lost, making way for the later rise of Adolf Hitler and all the terror that went with him.
Point of Deviation
In this timeline, Kaiser Wilhelm I. died at age 68 in 1874, being succeeded by his son Friedrich III. While Friedrich himself was too weak-willed to oppose the chancellor, his wife Victoria (a daughter of Britain's Empress of the same name) was well known for her emancipation and willpower. In the fourteen years of their rule, the Empire was transformed into a true constitutional monarchy based on the model of the United Kingdom, stabilizing the democratic system while retaining its rich monarchical traditions.
1874-1875: French Ultimatum crisis
When Wilhelm I died, the German economy was ride in the middle of a downhill slide following the boom of the "Gründerzeit" (Founding Epoch). Chancellor Bismarck detested the liberal anglophile ideas represented by the new Emperor and his wife, so he started a political war on his monarch. While most of the industrial, financial and intellectual elites sided with the Emperor, the traditional pillars of the Reich, military and nobility, sided with Bismarck. Emperor Friedrich's and Empress Victoria's lobby did prevail in the Reichstag (parliament), but Chancellor Bismarck repeatedly dissolved the parliament to undo any political progress that could be made. When the crisis escalated to the brink of a civil war in late 1875 over the issue of free trade vs. protectionism, France sensed its chance to snatch Alsace-Lorraine which it lost only four years ago to the Reich and issued an ultimatum: Return the territory or face war.
Diplomatic situation in 1875
This ultimatum came too early for Bismarck's diplomatic plans, as the "Dreikaiserabkommen" of 1873, a treaty between the Emperors of Germany, Austria and Russia, only held general phrases about not provoking war and trying to solve any differences diplomatically. There were no formal alliances in place yet, so everything depended on the ambitions of the other European powers.
The United Kingdom under the rule of Queen Victoria and Premier Minister Benjamin Disraeli saw the crowning of the anglophile German Emperor and Empress, the latter a daughter of the Queen herself, as a major turning point in European history. While they did not openly side with Germany against France, they made it clear that the UK would not tolerate a revanchist war in Europe.
Russia under Czar Alexander II had fully recovered from the disastrous Crimean War. Political reforms strengthened the Russian economy and military, while the marriage of the Czar's only daughter to a British duke just a few months ago mended the relations between the two powers. With the Dreikaiserabkommen, Russia found itself closer to Germany than to France, even if there was no formal alliance yet.
Austria had no ambitions for a war on the Western Front, as all its power was needed to hold together what it already owned. However, threatened by both Russia and Italy and with a revanchist Ottoman Empire and the Balkan powder keg to its south, Germany was the only friend it had and thus Kaiser Franz Joseph I openly supported the Germans against France, hoping to scare France away from waging war.
Italy under Victor Emmanuel II still hoped to acquire territories from Austria, yet the Italian unification was only possible because of Prussian support. With internal unrest (Italian annexation of the Papal State in 1870, alienating a large part of the staunch catholic Italian population) and a long list of recent military defeats against Austria, King Victor Emmanuel decided to lay back and wait for the events to come, only siding with France if victory seemed certain.
With this diplomatic state of affairs, France's only hope was that Germany sank into civil war while all the major powers held still, so a swift military intervention would suffice to rectify the borders along the river Rhine.
German reaction to the ultimatum
With the sudden appearance of an external enemy, public opinion rapidly swung away from political disputes and a wave of nationalism swept through the Empire. Bismarck tried to use this to brand the Emperor's political followers as the ones trying to weaken Germany from within, but this campaign badly backfired as the Emperor seized the initiative and called his people to unify against the arch enemy. The ultimatum was formally declined and the army mobilized, while Empress Victoria visited her mother in Britain to campaign for the German side.
Resolving the Crisis
Seeing the chances of a French success dwindle, the newly elected first President of the third French Republic, Patrice de Mac-Mahon, looked for a viable way out of the crisis. Bypassing Bismarck, a French delegation secretly met with the German Emperor Friedrich III himself, discussing the options for both sides. Friedrich needed to dismantle Bismarck, and Bismarck's best trump was the old German fear of a two-front-war against both Russia and France. France, on the other hand, was craving revanche for the loss of Alsace-Lorraine in 1871. Returning home with empty hands was no option for the President, as he was only recently elected and the whole Republican system depended on some sign of progress.
After intense discussions, Friedrich turned to the Bundesrat, the nominal highest body of the German Empire, even though Bismarck had seen to it that there was no real power involved. The Emperor presented a proposal to the leaders of the federated German states, which would decide over the future of the Reich in more than one way...
The Treaty of Metz (December 1, 1875)
While the German Empire would retain its province of Elsass-Lothringen (Alsace-Lorraine), it would pay a monetary compensation to France amounting to 60 percent of the reparations of 1871. During the European economic crisis, this would greatly boost the French economy and drain the German gold reserves, further deterioration its economic situation. To make up for this, a revolutionary diplomatic deal was brokered. France not only recognized the German possession of the former French province, but signed a pact of non-aggression for 25 years with its arch enemy. Elsass-Lothringen was to become a free-trade-zone for France and Germany, while the French and Catholic citizens in the province were guaranteed protection by the Emperor. For that, Elsass-Lothringen was granted a constitution and thus the status of a German state rather than an administrative province.
To gain the German states to accept this treaty, Friedrich also promised to revise the constitution of 1871 with the goal to cut down the chancellor's power and strengthen the states' position in the Empire.
1875-1876: German civil war
When the Treaty of Metz was announced and later ratified in France, the reactionary block was outraged and rebelled against the perceived treason of the Emperor. Bismarck dissolved both the Reichstag and the Bundesrat, called for the deposition of the monarch and proposed the coronation of Friedrich's teenage son Wilhelm as the new Kaiser. In turn, Emperor Friedrich III deposed Chancellor Bismarck and proposed the dissolution of the German Empire of 1871 and its subsequent replacement with a new, modernized constitution. The country was deeply divided and several cities went up in flames as burghers and nobles went to war. The leadership of the army was torn between its allegiance to the Emperor and its antipathy against the Emperor's politics. Leading army officers in the traditional heartland of Eastern Prussia declared support for Bismarck's plans and announced Wilhelm as their new emperor. The southern German states, especially the Kingdom of Bavaria, supported Friedrich, sending their regiments to restore order in the Reich.
The crisis further escalated when the proletarian workers unions declared a general strike and openly declared support for Friedrich III, which was swiftly seconded by liberal and intellectual organisations all over Germany. In the east, Prince Wilhelm styled himself Emperor Wilhelm II and received the oath of fealty from several divisions of the Prussian army. Of course, Bismarck intended to stay in the saddle and only used Wilhelm as a symbolic figure head, which did not meet with approval by the young usurper. Soon after the makeshift coronation, Wilhelm demanded obedience from his chancellor. Instead of caving in, Bismarck tried to pull in Wilhelm's brother Heinrich, who was only 13 years old at that time and thus seemed to make for a better puppet, but Heinrich had already been sent to his parents in Frankfurt and thus escaped fate.
In March 1876, the country was neatly divided along the Elbe river with Bismarck and Wilhelm fighting each other in the east and Friedrich and Victoria gathering support in the west. As almost all of the Reich's industrial resources were located within the western part, the balance was tilting against Bismarck. His final straw was the secession of Prussia from the Reich, which was declined furiously by Wilhelm. Bismarck nonetheless proclaimed his decision in Königsberg to the officers corps, but when Wilhelm had him arrested at the end of his proclamation and accused him of high treason against the German Empire, nobody moved to support the old man.
Watching the reactionary rebellion crumble but not wanting to shed more blood than necessary, Friedrich III offered an amnesty for "Germans of all political beliefs", while his troops were slowly putting out the fires of revolution from Magdeburg to Breslau. In September 1876, Generalfeldmarschall von Moltke met with Emperor Friedrich and formally returned the command of all German troops to imperial authority.
While the civil war was short and relatively low in casualties, it left a great rift in the German society which would take decades to heal. It also shifted public opinion heavily against reactionary elements and thus paved the way for liberal ideas that seemed unthinkable a few years ago.
In an address to his people on October 1, 1876, Kaiser Friedrich III appealed to the ideals of the German revolutions of 1848 and the unification wars of 1866-1871: Unity as one people, equality of all citizens and fraternity between all Germans regardless of their social status or religious or political beliefs. He addressed the youth of the Empire to devote their creative energy and eagerness to change things on rebuilding the German Empire on the inside, just as the older generation has built the Empire on the outside. As a means to this end, the Kaiser proclaimed the dissolution of the constitution and asked of all the German states - including Elsass-Lothringen - to construct a new, modern and liberal constitution worthy of the blood shed by past and current generations of their German brothers.
1877: The new constitution
The committee that had to decide upon the future German constitution consisted of ninety-seven emissaries of all parts of the Reich. They conferred from late January way into July 1877, often debating heatedly over nuances like the distribution of seats in the Bundesrat and the exact borders of electoral districts. In principle, though, the majority of them agreed on the general outline of the new political system.
There would be two large bodies of legislature: The Reichstag would remain basically unchanged, being elected by universal suffrage (men above the age of 25) with the main function to decide upon new laws and approve the annual budget. However, as the Chancellor's overpowered position has been trimmed, the Reichstag would finally play the important role it ought to. In addition to that directly elected parliament, each member state of the German Empire would send a number of representatives proportional to its population to the Bundesrat, which was the final tier of legislature. This meant a change in the relative weight of the member states favouring Prussia and Bavaria over the previous system. The fact that this change could succeed can mainly be attributed to Kaiser Friedrich himself, who joined the discussions regularily and fought for a mathematically fair rule set. The smaller states simply lacked the power to refuse, especially under the impression of the recent civil war and the economic baisse.
The largest change in the constitution was the disconnection of Prussian administration from the Imperial one. While Bismarck had fought any move to create a "German government" instead of simply increasing the power of the Prussian monarchy, the committee followed the English model with a complete set of Secretaries for the Reich. While internal affairs were kept to the states, there were now centralized Secretaries of Finance, Defence, Foreign affairs, and justice. The position of the German chancellor was kept, even though it was cut down to the equivalent of a Prime Minister and put under the system of checks and balances by the Reichstag.
The German Emperor would remain Head of State, acting for the Reich as a whole in a way quite similar to the British Queen Victoria, while still remaining the Prussian monarch with the corresponding full set of power there.
Kaiser Friedrich III and the newly appointed Chancellor Rudolf Virchow signed the constitution on August 13, 1877 in Berlin. The Reichstag elections started one month later.
1877-1879: Licking wounds
The main event of the year 1877, apart from the new constitution, was the trial against Otto von Bismarck who was accused of high treason against the German people. It was one of the first trials to be followed by the entire nation via newspapers, and it was discussed intensely in every single tavern, club or society. While the "Iron Chancellor" made for a perfect scapegoat for all that went wrong in the past years, he was also revered by the masses for being the true father of the German unification and thus a hero to the Reich. During the course of the trial, both prosecution and councel tried to convince the judges of Bismarck's senility, which he himself denied fervently. In the end, the verdict was life long arrest in a mental asylum in the Bavarian Alps. Thus the most prominent head of the Kaiserreich, the founder of Germany and the first servant of the Emperor was locked up for good and branded as a poor old geriatric loon.
A different matter was the handling of Friedrich's oldest son Wilhelm, who all too eagerly joined the "senile" Chancellor in his rebellion. While he was only sixteen years old during the events, his young age did not save him from facing the consequences of his deeds. The general amnesty (which did specifically not apply to Bismarck) meant there was no official trial, but a disloyal Prince was the last thing the shaken monarchy needed. Wilhelm was kicked out of the military school and stripped of his titles, leaving him only a large manor in Western Prussia to administer. By royal decree his younger brother Heinrich was appointed the new heir apparent, while Wilhelm and his blood line was excluded for all times. Though a necessary step (and generally applauded by the public), this family tragedy did not leave the ruling couple unscarred. During interviews and public speeches, the subject "Wilhelm" became a taboo. The first years of the liberal Empire were perceived as a curious mixture of economic hardships and social progress. There was an air of freedom all over the Empire, while reactionaries withdraw to their manors and laid low after their defeat in the Civil War. Kaiser Friedrich and Kaiserin Victoria toured the Reich, giving speeches in front of university graduation classes or opening German unification memorials.
Meanwhile the Empire struggled to pay the compensation for Elsass-Lothringen to France, which was somewhat eased by the easy access to British loans. With the lifting of restrictions on free press, new newspapers flooded the market from the largest metropolis to the most remote cottage. Arts and science bloomed, while industrial production only slowly recovered from the recession. Meanwhile, Europe drifted faster and faster towards the next big crisis, as Russia declared its intention to support the struggle of the Balkan Slavs to regain independence from Ottoman rule.