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She'd find herself in an awkward position of having to try and justify herself to Erdogan, yes, since he is not going to be inclined to be satisfied. You know what's even more awkward? Campaigning to repeal something she is actively exercising her discretion to require. The former is socially awkward and potentially damaging to her policy. The latter is damaging to her policy and to domestic politics, not to mention for her personally. There's a third way, of course. Wait for a conviction and THEN push for repeal, the "have cake and eat it too" approach. And that one is morally reprehensible.
All true, and I am edging to the idea that this case should run its course and only after they have the opinions of the court they should take a position on whether or not they should scrap this particular article.
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Erdogan is not actually a moron. Saying no could make him become uncooperative, yes. Saying yes and working to undermine the "yes" runs the same risk. And if Merkel and the German government isn't actually doing the latter at the very least, then my condemnation that the democratic republic in question has worse problems than Schengen and the refugee crisis stands.
I will not comment on your initial statement. Having said that he's a great tactician so he may even consider this blowing up and souring the relations with Germany a success.