I find it interesting the EU States can ban images within a videogame, and the publisher MUST comply with that restriction. I wonder if the same could happen with a US State? Could California declare "no more swastikas" and force Activision to edit California editions of Wolfenstein, or would the U.S. overrule that decision? If yes, could the EU eventually overrule Germany's law?
Except the EU does not have this pesky little "First Amendment" that the US does which, among other things, guarantees one's right to "freedom of speech" no matter how deplorable that speech might be. If any government in the US (be it the state of California, or our favorite disbarred activist/lawyer Jack Thompson) tried to get something like that banned, they would quickly get their head handed back to them by the Federal Court system. That would not prevent, say, WalMart from banning it within their stores as they are not a government entity. WalMart is known to often ban particularly vulgar or otherwise similarly NSFW music CD's in order to at least appear to be more "family friendly", as a result labels will often be "forced" to publish a sanitized for WalMart in order to be stocked (WalMart is the largest brick and mortar music retailer).
As far as the EU goes, I'm not terribly familiar with their government structure in terms of at what levels the EU governance overrides local governance, but while the member nations are in large part handing much of their sovereignty over to the EU parliament, they still maintain some level of independence (something we lost in the United States after the Civil War when the transition from what was a loose confederacy of states to an even more powerful centralized federal governing system was really solidified. I see Europe headed in a similar direction).
Sadly, the government of Germany, and apparently the people of Germany as a whole seem to still be sensitive about their involvement in the World Wars and in the Nazi regime to the point that such censorship is widely supported. There is plenty of Nazi/Racist sentiment within Germany in large part because of cultural aspects and "generational racism" where feelings and attitudes are passed down from parent, and grandparent, to child, but like we see in other forms of prohibition, such as alcohol in the 20's and drugs today, the fact that it is forbidden can make it more attractive, exciting, and "adventurous" to some.
I'm sure most here on Slashdot will agree that while such Neo-Nazi and racist sentiment such as the movements in Germany are "A bad thing (TM)", the proper action isn't to ignore the past and censor/ban any sort of expression that even appears to possible in some remote way relate to it, but rather to encourage an open discussion and exchange of ideas like the First Amendment in the United States was written to ensure.
I find it ironic that a region (Europe) that tries to be so "progressive" in many areas, become real stick-in-the-mud's in other areas such as German censorship laws, French cryptography laws, British firearm laws, etc.