Security and intelligence officials suspect Merkel and her allies in the Economy Ministry have softened restrictions on Huawei to preserve trade relations with Beijing, according to two German officials who asked not to be identified.
Hardliners in the ranks of Merkel's Christian Democrats say that government rules don't do enough to ensure Huawei equipment isn't used in the core of Germany's 5G network, potentially exposing crucial corporate and government operations to Chinese espionage or sabotage.
The Huawei dilemma illustrates the balancing act that Merkel has to pull off as she tries to defend German interests without riling the government in China, a key market for her country's exporters.
German companies want to use Huawei kit so they can make the leap to 5G communications technology as quickly and cheaply as possible, and officials in Beijing are sensitive to any suggestion the company is being excluded.
But intelligence officials are suspicious of Huawei's ties to the Chinese government and worried about the vulnerability of 5G networks.
Adding to Merkel's headaches, the U.S. administration has turned the Huawei case into a test of loyalty for western nations in its trade war with China.
The White House is also demanding tougher restrictions and threatening to end intelligence cooperation with Germany if Merkel doesn't deliver.
Merkel on Tuesday promised that German companies will soon have access to 5G technology at a reasonable price.
Deutsche Telekom AG has said that a 5G roll-out would be delayed by at least two years and cost the industry billions if a full ban were to be imposed on Huawei.
Bruno Kahl, who heads the Federal Intelligence Service, or BND, issued a warning in rare public testimony on Tuesday, saying Huawei was too dependent on the Chinese Communist Party and "can't be fully trusted."
The comments came a week after reports that the German Chancellery had intervened to soften security measures, effectively killing any attempt to impose a ban on Huawei.
"Despite a very intensive discussion that's lasted over many months, the position of the government is not clear — apparently not even to the heads of the intelligence services," Konstantin von Notz, a lawmaker with the opposition Green party who queried the BND chief in Tuesday's testimony, said in a statement to Bloomberg afterward.
Merkel's government has "failed to this day" to establish tough guidelines.
Huawei pushed back, saying that accusations over trustworthiness were unfounded for a company serving three billion people globally.
"We have never introduced, and would never entertain the thought of introducing, so-called ‘backdoors' in our equipment," Huawei said in an emailed response to a query. "No government agency or outside organization holds any shares in Huawei or controls Huawei in any way."
A group of lawmakers in Merkel's bloc led by Norbert Roettgen, the chairman of the parliamentary foreign affairs committee, added to the mounting dissent last week with an op-ed in Handelsblatt, the German daily, that called for the lower house, or Bundestag, to take control of assessing trustworthiness of 5G equipment suppliers.
The German Interior Ministry relented to criticism and has pledged to weigh political factors when assessing components for 5G, Handelsblatt reported.
Merkel's spokesman, Steffen Seibert, last week denied that the Chancellery had softened draft security standards by removing the ability of authorities to identify "untrustworthy" vendors.
"As far as we know, there was at no time during the drafting process a ‘banning clause,'" Seibert told reporters.
While not calling for a complete ban, officials in the BND as well as the foreign and interior ministries want to have the tools to keep Huawei out if they decide it poses a security risk.
The chances of German authorities determining whether equipment contains secret backdoors that could give China access to data is "very limited if not to say hopeless," Kahl said.
Even if it were possible, he added, a software update could "immediately" alter the network and open it to "sabotage or espionage."
