On a Monarchist Germany playthrough, I tend to let Austria-Hungary reform (if I'm doing the Focus on the True Enemy path). They make a decent ally, all things considered. Add Romania into the mix and you've got two good friends to help you out against Russia (three good friends if the Soviets invade Poland after you guarantee them). If you go down the Expatriate the Communists path, then absolutely try to ally with Austria as quickly as possible. If you get them into your faction fast enough, you can block Hungary from doing anything useful with the Pact of Rome. Annexing Austria in that fashion splits the Pact of Rome up geographically, allowing you to deal with Hungary and Italy separately.