Otto's family spent the subsequent years in Switzerland, and on the Portuguese island of Madeira, where 34-year-old Charles died in 1922, leaving the nine-year-old Otto pretender to the throne. On his father's deathbed, his mother, Empress Dowager Zita, told Otto, "your father is now sleeping the eternal sleep—you are now Emperor and King". The family eventually relocated to the Basque town of Lekeitio, where forty Spanish grandees bought them a villa.

Meanwhile, the Austrian parliament had officially expelled the Habsburg dynasty and confiscated all the official property via the Habsburg Law of 3 April 1919. Charles was banned from ever returning to Austria again, while Otto and other male members could return only if they renounced all claims to the throne and accepted the status of private citizens.

In 1935, he graduated with a PhD degree in Political and Social Sciences from the University of Louvain in Belgium. His thesis was on "the right, born of usage and of the peasant law of inheritance, of the indivisibility of rural land ownership in Austria". In 1937 he wrote,

I know very well that the overwhelming majority of the Austrian population would like me to assume the heritage of the peace emperor, my beloved father, rather earlier than later .... The [Austrian] people have never cast a vote in favor of the republic. They have remained silent as long as they were exhausted from the long fight, and taken by surprise by the audacity of the revolutionaries of 1918 and 1919. They shook off their resignation when they realized that the revolution had raped their right to life and freedom. … Such trust places a heavy burden on me. I accept it readily. God willing, the hour of reunion between the Duke and the people will arrive soon.

He continued to enjoy considerable public support in Austria; from 1931 to 1938, 1,603 Austrian municipalities named Otto an honorary citizen. John Gunther believed that Zita was less popular among Austrians, however, writing in 1936 that "restoration would be a good deal closer if Otto's return would not mean also the return of his mother—to say nothing of hundreds of assorted and impoverished Habsburg cousins and aunts, who would flock to Vienna like ants to a keg of syrup". A greater obstacle, he wrote, was the opposition of Czechoslovakia and Yugoslavia, which feared that their people might want to rejoin a recreated monarchy.