Susanne can (and will?) tell you much more about the German folkscene than I can. But I shall give you a personal account and some more general reasons why feelings towards Deutsche Volksmusik are somewhat mixed in those Germans who love folk music.I grew up with German songs sung by my parents, sung in the boy scouts and I loved singing them. At about 18-20 I found that many of those songs had a very conservative (reactionary) background and some of the more innocent ones had been "browned in" by a too close association with Hitler. Can you imagine my horror when I found out that too many of the songs I loved where printed in my father's 'songbook of the Hitler youth'? I stopped loving Deutsche Volkslieder at all.
Loving Irish and later Scottish, English, and recently American folk music was a kind of outlet. This was a music in which you could have pride and love without the singing tradition being interrupted by a period of horror. I was fairly, and still am though slightly less so, left of the middle of the political spectrum and didn't want to be identified or identify with 'right-wing' music.
I was very naive. About ten years later I slowly found out that there were several Irish (English etc.) songs I didn't like at all for several reasons and I slowly rediscovered the beauty of many German songs. I even found that there was a huge reservoir of German democratic and revolutionary or rebellious songs. Many of these songs had never been sung by the Hitler youth. Others had been sung by them but why should I not sing a song from the Bauernaufstand (peasants' uprise) in the middle ages only for it having been sung in the Third Reich as well?
I then even found that there were many groups and singers (though overall a minority) in Germany singing these good songs and many of them in a musical style similar to what I knew from english-language folk. The list is very long and I can only mention a few like Zupfgeigenhansel, Hannes Wader, Elster Silberflug, Ougenweide, Fiedel Michel,... I listen to their recordings with as much fun as I listen to the best of english-language folk musicians. Only in passing I mention the beautiful Music by minorities in Germany as Sinti and Roma (Reinhardt family) and the recent developments of blending different traditions from immigrants from (roughly) South Europe with the German tradition (Schää Sick Brass Band; mind you, only the last two words are English).
However, there is still a big divide. Deutsche Volksmusik is often entwined with political reactionary groups. The many songs from former German parts in East Europe (now Russian, Baltic, Polish and Czech) are sung nearly exclusively by Vertriebene (expelled persons) who long to get their homes back. The songs are often very beautiful, but the political allegiance of the organisations of the expelled is often at least to the very extreme of the parlamentiary right, sometimes beyond that. Singing these songs means to be identified with that tiny political minority of revanchists or to explain yourself continuously.
And there is a big divide in musical taste. The prime example is Heino, a singer of German folk dividing hearts and families. Heino's political leanings are impeccable (though not those of his fans, often to his dismay), but his music is, well, marching music, umpta, easy beat. I love many of the songs but I shall never listen to Heino any longer than it takes to change the station. It's just personal taste, same as I now know to avoid Irish CDs which have more than three of the following items on their cover: donkey, turf, red-haired girl, shamrock, harp, leprechaun.
What I consider to be good German folkmusic I find about twice a year in German TV. The Volksmusik-Hitparade (no need of translation) comes about once a week, Saturday evening. Not my music at all. When I sometimes look for German Volksmusik CDs in other countries I nearly exclusively find the music I don't like. A bit similar to German wines. There are so many fine German wines, but abroad I only find Liebfrauenmilch (Blue Nun). We seem to be proud to export the worst of our music and wines. It's a pity. But then, my taste is obviously a minority taste.
I wouldn't mind at all singing German songs at Mudcat gatherings. There are so many good ones that it would be easy to fill an evening. But as many above have seen correctly, the traditon is broken by Hitler's years and all lovers of folk music still feel the divide until now between what I call German folk and Deutsche Volksmusik. If you want to read a tiny bit more to understand why the political inheritance of German folk is still heavy on us, read the German contributions to the Ich hatt' einen Kameraden thread. You might understand why we are sometimes divided within our own souls.
Wolfgang