AfD politics violate the constitution in numerous ways, and the German institute for human rights says the party could be banned:
https://www.euronews.com/2023/06/14/should-germany-ban-afd-what-impact-could-this-have
Politically, it’s of course a risky maneuver, but the correct one if you ask me.
Of course it is complex. A few points:
If you ban a party in Germany, it’s automatically bans all „clones“ of that party, and all of its members in high functions can’t participate in these clones. Failure to comply would lead to an immediate ban of the clone. While I agree that eventually, a new far right with other people will probably form, it would take years for them to reorganize and they would have to be extremely careful. I believe that a ban would probably yield at least 10 years of far-right free politics.
Appeasement of the far right has failed every time in history, they will cannibalize every attempt to include them in any sort of „rational“ discourse. Banning parties is a lever that exists precisely because of Germany‘s history. IMHO it sends a strong message to all the non-far-right people (of which there are approx. 60-70%) that bullshit will not be tolerated.
In contrast, doing nothing signals that what the AfD is doing is fine and will move the discourse farther and farther right.
Stopping funding and preventing them from entering the Parliament is precisely what a ban would do, so I am not sure why the difference is between that and what you are suggesting.