When news of the overture leaked in April 1918, Karl denied all involvement until the French prime minister Georges Clemenceau published letters signed by him. This led to Czernin's resignation, forcing Austria-Hungary into an even more dependent position with respect to its seemingly wronged German ally.

The Austro-Hungarian Empire was wracked by inner turmoil in the final years of the war, with much tension between ethnic groups. US President Woodrow Wilson demanded that the Empire allow for the self-determination of its peoples as part of his Fourteen Points. In response, Karl agreed to reconvene the Imperial parliament and allow for the creation of a confederation with each national group exercising self-governance. However, the reforms quickly spiraled out of control, with each national government declaring complete independence. Karl's political future quickly became uncertain.

For a while it appeared as though he might reign as monarch of a newly independent Austria, but Austria's new republican government ultimately vetoed this idea. On November 11, 1918, he proclaimed formally "I relinquish every participation in the administration of the State" but did not abdicate his thrones. He then fled to Switzerland and continued to pursue regaining power from exile.

Encouraged by Hungarian nationalists, he sought twice in 1921 to reclaim the throne of Hungary but failed due to various factors including the lack of support of the Hungarian Regent Miklós Horthy. Horthy's failure to support Karl's restoration attempts is often described as "treasonous" by monarchists. Critics suggest that Horthy's actions were more firmly grounded in political reality than the King of Hungary and his supporters.

He died of severe pneumonia (brought on after Karl, an already sickly man, walked into town on a freezing winter's day) on the Portuguese island of Madeira in 1922.