"The borders mentioned in the first stanza reflected the breadth of territory across which German speakers were spread at the time of composition, but there were large territories inside the borders which were inhabited mainly by non-German speakers." (this is sentence is from the wiki)
If you imagine there wouldn't exist an European Union an people would still dream of that, there would be a song with "European union above everything the world..from portugal to russia" or so.
I have to say I am german and for me it's no big deal as the orignal meaning is the more important one. Of course you have to know the history of the first stanza and it's use (plus the horst wessel lied) as anthem during the third realm.
But...

after some googleling (it's really hard to find something about nico) I have to say I can see the controvesy. By the time she recorded it the war was only 27 years over. So the Nazi connection was still present. People who listened to nico at that time had to be reminded of the unbelieveable crimes their parents did. So it could feel like an insult.
I didn't find an article form that time. All I found where some biographys saying that there were lots of negative feedback coming from germany. Although I still don't know if it was because of the fact she sung the song or because she dedicated it to Baader at concerts (or maybe both)
It was a good point what Arjan wrote, but I think Nico was serious when she dedicated it to Baader.
I found 80s interview of her. It's a short biography mixed with her life in the 80s and the interview. It's in german.
My english isn't that great so I only try to write shortly what nico said about the reactions towards "das lied der deutschen"
He writes that nico was always serious, and never ironic or making jokes. and that she was pretty naiv.
Even in 1984 (the time the interview was made) she didn't understand the negative reactions.
She said that it was only meant nostalgic. When she was a young girl, she was on a big place in Berlin and one of Hitler's people, Goebbels or Göring made a speech and the whole place sung "Deutschland, Deutschland über alles.." And she was overwhelmed by it
"that's the only reason I sung it. I only sung the words because they existed already before"
The interviewer mentioned to her that it was a big risk to sing such song out of the historic context, but nico didn't want or (what the interviewer believes) simply didn't understand. the only thing she added to this was "why should I provoce anyone, what's in it for me?"
that's the part to which I am refering, if anyone understands german:
"Klare Aussagen waren aus NICO nur schwer herauszuholen. Doch das war kein Trick. NICO hat in den Interviews, die ich mit ihr führte, nie taktiert. Der Mythos , der sie schon damals umgab, vernebelte ihre wahren Intentionen und stilisierte diese ins Morbide und Absurde. Doch Humor (ich habe sie nie lachen sehen!) und so etwas wie Ironie waren NICO fremd. Sie war trotz der Beschäftigung mit Mythen und archaischen Wurzeln einer extrem naive Person.
Einen Karriereknick verursachte ihre Version der deutschen Nationalhymne. Von dem in die Moll-Tonart transponierten "Lied Der Deutschen" (das Finale ihrer 74er LP "The End") sang NICO alle drei Strophen und widmete es bei ihren Konzerten in den 70er Jahren Andreas Baader und Ulrike Meinhof. Ein Hagel von Protest und Wurfgeschossen der sich vornehmlich "links" definierenden Fan-Klientel war die Antwort und NICOs gesellschaftlicher Tod...! Die drastischen Reaktionen auf ihre Version des Deutschlandliedes konnte NICO auch 1984 nicht verstehen.....
Nico: "Es war rein nostalgisch. Als ich ein kleines Mädchen war, stand ich auf dem Riesenplatz in Berlin und einer von den Hitlerleuten, Goebbels oder Göring hat da eine Ansprache gehalten und der ganze Platz sang 'Deutschland Deutschland über alles' - und das fand ich so überwältigend!
Das ist der einzige Grund! Die Worte habe ich nur gesungen, weil sie sowieso schon da waren....!"
Meinen Einwand, daß es schon ein Risiko ist, derartiges Sangesgut aus seinem zeitlichen Kontext herauszuschälen, wollte NICO nicht verstehen, oder - was ich heute fast noch mehr vermute - konnte ihn wegen ihrer grenzenlosen Naivität nicht begreifen ("Warum sollte ich jemanden provozieren, was habe ich davon?" war alles, was sie dazu noch sagen wollte....)"
and the link to the whole story:
http://www.grenzwellen.com/gw_redaktion ... storyid=92