I hard the story from my grandfather and surviving Austrian/German relatives but it was actually was more like this article I got off the internet.
Austria and 1938
A union between Germany and Austria had been forbidden under the terms of the Versailles Treaty but in 1938 this took place. Between 1933 and 1935, Austria had been protected against any German bullying by Italy. In fact, in 1934, Italy had massed her troops on the Brenner Pass when it seemed that Germany might take over Austria after the Austrian chancellor Dollfus had been murdered by right-wing thugs. The message to Hitler was clear and there was no German occupation of the Austria.
By 1936, Germany and Italy were forming a friendship and by the end of 1936, Mussolini withdraw his support for Austria. In 1937, the Austrian chancellor, Schuschnigg, was actually told by Mussolini that Italy would no longer defend Austria against attack.
Hitler had always seen Austria as being part of Germany. He, himself, had been born in the Austrian town of Brannau, but for all his life Hitler considered himself German. Many Austrians had the same belief so that Hitler felt empowered to bully Schuschnigg into submission. In February 1938, Hitler gave the Austrian chancellor a list of ten demands. The chief demand was that a man called Seyss-Inquart should be made Minister of the Interior. Seyss-Inquart was an Austrian Nazi and such a position would give him control of the Austrian police. Such a demand was clearly unacceptable to Schuschnigg.
The chancellor tried a different ploy. He made it known that he would order a plebiscite (a vote on one question) about whether the people of Austria wanted a free Austria or not. Hitler could not be sure that he would get the result he wanted from this proposed plebiscite. If the plebiscite went ahead and the Austrians voted effectively against Hitler, he would be put in a very difficult position. Hitler demanded that the plebiscite should not take place and that Schuschnigg should resign. If neither of these took place, he told the chancellor that he would order his military to invade Austria. In the memories of people of Europe, was the devastation of Guernica in Spain caused by the bombers of the Luftwaffe - in fact, Hitler had threatened to turn Vienna into the "Spain of Austria".
Schuschnigg could not take this risk and he resigned - along with his cabinet. The only member of his cabinet not to resign was Seyss-Inquart. As the sole member of the Austrian government, he invited German troops into Austria in March 1938. On March 15th 1938, Hitler entered Vienna in triumph. The pleasure of the huge crowds was difficult to disguise. It is said that even Hitler was surprised by the size of the crowds and by the cheering. Austria became part of the German Greater Reich; Schuschnigg was arrested and imprisoned and almost immediately the Austrian Jews lost their rights.
What did the powers of Europe do? Mussolini, as expected, did nothing. Britain and France verbally protested to the German government but did nothing else - just as Hitler had predicted.
My grandfather on my mothers side came to America in the mid 1890's as a young boy and grandpa joined the American Navy in 1913. He was in both WW1 and WW2. He had relatives who were Nazis, and Wehrmacht in Germany during the world wars, some who were not, and some that had the insight to get out in the mid to late 1930's and also come to America. Grandad hated most of his relatives that stayed in Germany and were on the "other side" due to their efforts in the SS and Wehrmacht.
Anyhow, I got to speak to one of his relaitves that had retired from the CIA, which was the OSS during WW2, before he want back to Germany in the mid 1970's and he pretty much said the same as the above article I got off the internet was how it came to be with Germany and Austria. I think he would know as he was a German SS officer who ran to the allies when Berlin fell in 1945 and went to work for the OSS.