Actually, the funny part is, that spying on Mrs. Merkel phone is the NSAs job. And she's got a number of people whose job it is to prevent such spying. Technically, btw, as far as it's known, only Merkel's private (or technically party) mobile has been intercepted. In effect most relevant stuff was certainly interceptable => because her communication partners have to rely on "normal" communication systems designed to be easily intercepted.
Spying on the whole German population is the big issue. Mass-surveillance is a problem, it violates basically the 4th ammendment (and their local counterparts, e.g. in Germany, as you've mentioned the example, it's the "Fernmeldegeheimnis", communication privacy that is a constituional basic right). One of the things that was disliked about the Britons back than that they used to do basically warrentless searches, for whatever reason.
Now consider that the NSA wants all electronic communication world wide, and that naturally includes communication by US citizens at home. So think, if the population (because the political caste in D.C. is way less interested) manages to forbid domestic mass surveillance, And they manage to make it stick (against a bureacracy shredded into multiple layers of secrecy for the "common good", invoking "national security" every second sentence). Now what do you think will keep the NSA from asking their British friends to do some spying, under supervision for them? A good pretence would be e.g. "Safety of NATO personal deployed in the US", that's what the German BND (which is mostly forbidden to work inside the borders) did, just ask the allied agency that have the right to spy (via the NATO treaty and related "formerly secret" treaties) in Germany. Not probable, but the British inteligence community is very intimate with the US, even more than the other members of the "Five Eyes" club.
So basically, what we've got are highly unregulated secret organizations (where even the official oversight, usually from the legeslative branch has not enough insight, and still has to rely on the perps themselves not to lie), which have shown in the past a tendency to work around any legal issues very creatively, by doing the illegal thing (and cover it under the "national security" tag, to avoid scrutiny), by interpreting law in fascinating ways (e.g. creative interpretations of the Patriot Act, rubber stamp it at the FISA Court, and again we wouldn't want independent analysis if the legal creative interpretation is okay, so it's a question of "national security"), ...
And if everything else breaks, split the bad stuff up internationally, there are enough allied spooks that are not explicitly forbidden to do the bad deed in question, ...
"And no, Senator, we cannot tell you that, because that information "belongs" to an allied foreign agency, and sharing it would endanger international cooperation, and you know, that cannot be allowed, because the bad bad terrorists would win."
