It really sounds like you're not understanding the idea of prosecutorial discretion - a quintessential function of the executive.
Prosecutorial discretion is, obviously, at the discretion of the prosecutor, not the executive. The fact that this particular - outdated - law makes an exception to that, as you say, quintessential discretion, is precisely why it's outdated.
In lay terms: it's not the government's prerogative to prosecute or not to prosecute. That is a matter for the prosecutors. That this particular law hands the government a special prerogative by way of exception, does not imply the government should take it.
That is at the discretion of the government. The government decided not to exercise its - exceptional - prerogative. Given the idea of separation of powers, this is, legally speaking, the only correct decision. It is, may be assumed, primarily for this reason that this particular law is scheduled to be abolished.
From what others have said, that discretion is explicitly given to the government in relation to this law. There is no interference with the judicial branch by exercising that discretion.
On the contrary, that is precisely what would be the case should the executive have chosen to exercise its prerogative.
As has been mentioned with regard to the FBI request to provide a backdoor to an Apple iPhone, there's no such thing as a 'one time only' action when it comes to law. Every legal action sets a possible precedent. This would be an additional reason for the abolishment of such a law.
But more to the point, the fact that a law gives the government discretion does not negate the fact that it breaches the separation of powers. Which is, in fact, what this law allows. The government, in my opinion wisely, chose to ignore this
executive discretion - which is quite something else than
prosecutorial discretion. The latter belongs, as the term already implies, with the prosecution.
Summing up, the issue seems to be seeing this particular law not in the wider context of law. Or rather, in this particular case, people would like the German government to have made a
political decision to the effect of not allowing prosecution altogether. Admirable though that may be, from a legal point of view it would not have been correct. That Merkel takes the blame for
not making a legal decision (to prosecute or not to prosecute) political, is the obvious effect of this. But the two should not be confused: from the point of view of legal consistency this was the right decision - politically 'incorrect' though it may be.
Seeing as people have also suggested Merkel folding in view of the refugee deal with Turkey, perhaps it is of interest to remind of Merkel's initial stance when faced with this 'refugee crisis': she welcomed refugees - with the result of taking the political backlash from our xenophobic good citizens. We now see Merkel also taking the political blame form politically correct good citizens. It would appear Merkel can do no good whatever her stance. Yet in all this Merkel has been the one with the correct principle: there is no legal right to refuse refugees. On the contrary: there is a legal obligation to welcome refugees. It is ironic to see Merkel then take the blame for an arrangement she rather would not have, but has been forced to uphold in force of upstanding xenophobic Europeans who have no clue about the 'European values' they claim are being threatened. It's neither refugees nor Erdogan threatening European values: it's Europeans themselves, forgetting the very values which are the foundation of the political union that is the EU.
But of course, none of that is a legal matter. Or is it?
