The area circled shows the thermostat housing. It is made of plastic and it may also be brittle. Do you know if it is the original housing?
While in there, I would replace the water pump, thermostat, housing and gasket.
Be careful when purging the air out of the system. There are several good write ups in this forum about it. In my own experience, I had to let the car idle for 10 minutes or so under my watch, and when the temperature gauge started to creep up to the red zone, I turned the engine off, unscrewed the bleeder screw (on the thermostat housing) to let the air out. I lt the engine cool and then re-filled with anti-freeze. I then repeated this process about 3 times until the air was completely out and the temperature would not creep up any more. I test drove it for 20 minutes or so near my home just in case. In my case it was all that was needed.
Good luck with your E39.