A few general remarks first:
1. The two-chamber approach proposed by Hatman is difficult to apply to a Federation, where the second chamber serves representing member states interests. Note especially in this respect that the division of responsibilities between the German Bundestag (parliament) and Bundesrat (state representation) is quite different from the US-American one. The Bundesrat does not have any direct legislative nor budgetary power, but instead can veto on all federal legislation that affects state rights.
The way the German fiscal and administrative system is made up, a good part of federal legislation affects the states, either income-wise (as revenue from most taxes is shared between federation and states), or cost-wise (as the states are responsible for most implementation tasks). This gives the Bundesrat quite some leverage, which is partly also used in a partisan way (e.g. for blocking certain tax reforms). Most of the Bundesrat discussion and vote, however, is about technical issues such as implementation structures and procedures for federal legislation, and financial compensation by the federal government for tasks to be taken over by the states.
In line with this scope and function, Bundesrat members are not directly elected, but become so as member of their states' governments. Each state delegation has to vote as a block. Whether this system is practical or not is another discussion (I personally think it has served Germany quite well, and spared us a lot of "state rights" discussion, as well as the whole earmarking stuff).
2. PV electoral systems have a natural electoral threshold, which depends on the number of seats. This number, in turn, tends to reflect the size of the country in question. In the case of the Netherlands (150 seats in the second chamber), the natural electoral threshold is around 0.66%. In Germany (598 Bundestag seats), it gets below 0.17%. Considering mini parties staying even below that threshold, and vote allocation according to Ste. League (favouring smaller parties), the effective natural threshold in Germany might get as low as 0.15%. Without PV, in addition to the FDP and the AfD, another 7-8 parties would have gained parliamentary seats in the recent German federal election, only two of which (Pirates and NPD), however, passed the Dutch natural threshold.
3. A way to work around this effect is PV for separate "mega-constituencies". The Weimar Republic had 35 such constituencies, with between six to seventeen seats per constituency distributed by PV. The result was a natural electoral threshold between 6% and 16%, which was partially balanced by allowing to cast over "unused" votes to neighbouring districts, with a final compensation being done
on the national level. Nevertheless, the 1924 elections had the Bayerische Bauernbund, a regionalist Bavarian party, gaining three seats from 0.7% of the vote, while the USPD lost representation, as their 0.8% were too dispersed to anywhere cross the national threshold. Equally, the regionalist Deutsch-Hannoversche Partei gained 5 seats on their 1.1%, the Deutschsoziale Partei, with slightly more votes only 4 seats. Similar imbalances have been discussed for the recent Norwegian election (Norway's electoral system is similar to the Weimar one), and will as well become obvious in the upcoming Luxemburg elections.
In short - the 5% threshold level is debatable. Following a ruling by the German Constitutional Court, the electoral threshold for the European Parliament has in Germany been lowered to 3%. It might also make sense to harmonise the electoral threshold with the public financing threshold - German parties are entitled to some 3 Euros public funding per vote received, provided they have received more than 1% of the vote.
The main problem (or benefit depending on your POV) with the high 5% threshold is that it keeps regional parties from forming. The only party that is even close to being a regional party is the CSU, but as far as I can tell, that would be like saying the DFL of Minnesota is separate from the Democratic Party here. Even then the CSU is only able to win party list seats some of the time. In 2009, all it got were the 45 constituency seats of Bavaria.
In Germany, parties need to either pass the 5% threshold, or gain at least three constituencies for their votes to be considered in PV. In 1994, this allowed the PDS (now Die Linke, at that time still very much an East German party) to enter the Bundestag at 4.4% of the total vote. Ethnic minority parties are generally exempt from the 5% threshold. This is in particular relevant for the Danish minority party SSW in Schleswig-Holstein state elections.
