What is the right course of action here?

Your answer is correct because stopping at the stop line and allowing the blue car to proceed first is the right procedure here.

According to German traffic rules, a stop sign requires you to come to a complete stop at the marked stop line. You must then give the right of way to any vehicles on the main road or those who do not have to stop. The blue car is on the main road and does not have a stop sign, so it has priority to go first. Only after the blue car has passed can you proceed safely. The red car also has to yield because it is at a yield sign (not a stop sign), so your responsibility is to stop and let other vehicles with priority go before you proceed.

This rule ensures safety and order at intersections with stop and yield signs. Always stop fully at a stop sign and yield the right of way to drivers on the main road or those without stop signs.