1. You add a new language in admin for german with the proper info and it will clone all the english strings. You can then set your language in config to german. You will then be able to edit all the strings to german one by one.
That is good if you want to do it via an interface.
2. If you want to do it so that you possibly can release a german pack that we can look into including in the software or posting it here for others in the mod corner my suggestion is to rename phrases.php to german.php and then do as you posted above. That is the correct action for making a new language pack now and that file would be usuable by anyone on any site if done that way if you want to share with others.
You do not want your phrases to have an auto increment number so the first number would be say '' so it uses the next available. The last number on the phrases needs to correspond to the entry number for the language.