What is the right course of action?

Answer 1 is correct because at an uncontrolled intersection in Germany the basic rule is “right before left” (Rechts vor Links). The traffic sign shown only warns of an intersection; it does not change priority.

Here, you want to turn left. That means you must first let traffic coming from your right go, because it has priority over you. The blue car is coming from the right, so it goes first. After it has passed, you may turn left before the other car(s) that do not have priority over you at that moment.

Rule of thumb for similar questions: if there are no priority signs or traffic lights, always check to your right first and yield to vehicles coming from there, even if you are turning and even if the other vehicle is going straight.