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The cutoffs and bonuses are necessary in proportionally elected parliaments, otherwise the incentive would be for every niche interest to get a party unless there was no way it could achieve even 1 seat (which in a say 300 seat parliament would be 0.33% of the vote). You’d have dozens of parties and wrangling them together into coalition would be impossible. Israel is an arguable failure state; it has a low threshold of 3% and no majority bonus system which is really what it needs.
The more you look into non-FPTP traditional constituency systems the more problems come up. The UK/US two-party systems have major problems but force the public to make compromises instead of (just) politicians, which I think is theoretically preferable.
The actual instability in many continental (ie. usually PR-using) countries is less due to the small parties (they're often easy to ignore - they're small!) and more because there are major parties that are politically toxic (due to being extreme right or extreme left, or separatists) and thus basically almost automatically out of the government, which thus forces the rest of the parties into ideologically amorphous, unstable coalitions, or alternatively leads o the creation of large ideologically amorphous, unstable "system parties" (like the Italian Christian Democrats, the hegemonic party due to the main opposition being the Communists who were kept out of the government) where political barons bring down governments and cut each other down due to byzantine political machinations or simply due to spite.
The reason why those parties exist is because there are or were deeper systemic factors in those countries leading to large portions of population choosing such extreme or separatist parties. The Weimar Republic was not unstable because of its electoral system but simply because huge portions of the German population distrusted democracy and supported antidemocratic parties like the Communist, Nazis and the DNVP. If unstable countries were using FPTP, the same factors would just express themselves otherwise; the extreme left and right would eventually affect and radicalize the mainstream parties, and separatist/ethnic parties are usually concentrated enough to elect MPs even in FPTP systems.
The main FPTP-using countries, ie. Anglo countries, have been stable because they have been wealthy and have had longlasting liberal democratic cultures with powerful mechanisms encouraging stability. Nevertheless, even they've seen increasing destabilization lately, and that destabilization has then channeled itself in different ways, so you have the Trump presidency, Corbyn leadership in Labour and the Brexit.
A large number of parties making coalitions more difficult in Weimar was at least the excuse the Grundgesetz used to impose a 5% limit on votes. And I think that argument has a bit of a point. I mean, in the 1928 elections in Germany.
Percentage of Reichstag seats:
Here, the five parties under the heading democratic formed a coalition with had a whopping 61.2% majority. I am not sure why they did it that way. They obviously needed SPD and Zentrum. Perhaps a coalition with the DVP only would have resulted in the them being more vulnerable to threats of the DVP to walk out. Instead with the five party coalition, none of the three junior partners could threaten to break the government by walking out. Or they wanted to share power among the democratic parties to ensure that none of them would profit more by defecting to the anti-democrats. From a modern German perspective, this seems weird. Top politicians generally want to become ministers. Anyone suggesting that a coalition should give up 19% of the minister posts to parties which they don't require to form a majority to be more inclusive towards fellow democratic-minded parties would be laughed out of the room.
Did I have a point to make? Hm... if the Reichstag had a 5% barrier to entry, then 21.2% of the seats would not have gone to smaller parties. But 8.5% of them would just have been shuffled around among the coalition (BVP going to Zentrum, DDP perhaps forming a general liberal party with DVP). At the the ~10% of seats of the Others might have bolstered the ranks of the bigger democratic parties.
For democracy to thrive, you need both a viable coalition of democratic parties and a credible opposition of democratic parties offering another option. If 11% of the seats are taken by people who want to establish the dictatorship of the proletariat and some 17% are by people who want to restore the monarchy or establish a Fuehrerstaat, then you are in trouble perhaps not immediately but in the next elections, as people disillusioned with the previous government end decide to vote them out, and will likely turn to the extremist parties.
It is a bit of a catch-22: if the democrats don't form coalitions with the toxic extremist parties, the extremist parties won't get blamed for bad outcomes while the democrats will, and if they form coalitions with them they might just enable a Machtergreifung.
Having ten or percent of the seats occupied by sub-5% small parties which can not form stable coalitions due to scaling issues is making the problem a bit worse, but the main problem is the extremist parties.
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If voters are required to compromise, if the amount of information they can give with their ballot is reduced, discovering their true preferences becomes harder. It adds another layer of obfuscation on top of the already indirect (representative) democracy.
True, and that's what proponents of PR argue, that, say, the German system allows for the 'right' to consist of a center-right party (CDU/CSU), a libertarian party (FDP) and a nativist party (AfD) that reflect nuanced positions in the electorate. Another example is Israel where there are various minor flavors of secular vs. religious vs. very religious nationalist parties, centrist religious nationalist parties, ethnic parties and so on. But the downside is that many of the same voters feel betrayed when 'their' politicians compromise, which means that they quickly support and abandon certain parties, which makes dealmaking very difficult because everyone is afraid of being destroyed at the next election, which means nobody is willing to compromise to the extent necessary, which results in gridlock.
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