It's not true that there are no flags hanging around in European countries, especially in Alpine countries you will often see their national flag hanging at the mountain huts. Don't you see those in Switserland, Diana? At other 'holiday' oriented places (like campsites, for instance) you'll often see the flags of loads of countries, with the national flag hanging more prominently in the middle. I think that's kind of sympathetic
The same with sport events. Apart from these 'international' oriented themes, you'll see flags on special holidays and in royal family related days (at least, in countries that have a monarchy). The main difference it that it's more a special occasion thing to have flags hanging out, than an everyday thing like in the US.
Anyway, it is true that displaying the flag on your clothes (and especially on your arm) has an association with rightwinged extremism, but I think that that's only because the 'neo-nazis' adopted it as a symbol, and because of that most people shy away from using flags as pieces of clothing. That doesn't have much to do with the flag itself, though. Similarly people wouldn't wear white laces in black army shoes cause that's also adopted as an 'nazi-symbol'.
So, I don't really believe that flag has much to do with extreme nationalism at all, it's just symbolic for a country.
Also I don't agree with Red's statements at all, that it has anything to do with political stability, but then, that post was made in response to the idea that Europeans don't use their flags, which is in itself not true... Ah well...