What is the right course of action here?

Your choice is correct: you must stop at the stop line and let the blue car go first.

A STOP sign in Germany means a mandatory full stop (complete standstill) at the stop line. If there is a stop line, you stop there first; only if there is no line do you stop at the point where you can see the intersecting road. After stopping, you may only continue when you can do so without forcing others to brake or change course.

Here the additional sign shows that the priority road bends. That means the vehicles on that priority road have right of way through the junction. The blue car is on that priority road, so after your mandatory stop you must give way to it.

The red car does not have priority over you in this situation, so you do not have to wait for it unless it would actually conflict with your path. Rule of thumb for similar questions: STOP always means “stop first, then yield,” and the extra priority-road sign tells you who has priority even when the junction isn’t a simple straight main road.