My suspicion in Germany is that Die Linke is going to get sane-washed before AfD does; if it really is replaced by a wholly new Wagenknecht-led party which the SPD and Greens are broadly willing to form a coalition with, then an actually left-wing coalition becomes an option again, and the "negative majority" scenario of AfD and Linke is placed much further away.
I agree that there's obviously room for a party between where the current CDU is and where the current AfD is (and the polls showing the CSU going national would do well demonstrate this), but I don't think such a party is all that close to actually forming while the CDU is polling so well for the next election, and I think when it does form it would be likelier to do well if it were a further-right breakoff from the CDU/CSU rather than if it were the AfD splitting in half. It's kind of forgotten now outside the Netherlands, but PVV was originally a split-off from the VVD (and it also benefited from the general legacy of Pim Fortuyn making the cordon sanitaire against the far-right much less of a thing than it was in most places), and I think this made them more credible to certain voters.
Isnt the Wagenknecht party viewed as more out of the mainstream than Die Linke?
Depends on what you see as mainstream and what the party will actually look like. (It has not been founded yet.) But in general, the main problem with the LINKE is its SED legacy, its “woke” tendencies, and its open door immigration policy, which is clearly not in line with German public opinion in 2023. Just look at who they have nominated for the upcoming European elections. The main problem with Wagenknecht’s party will most likely be its foreign policy positions, its lack of support for European integration, and… well, the fact that it will be Wagenknecht’s party and there is a deep political distrust of this kind of hyper-personalistic politics.