It's not "degraded" if it has rust. Brakes rust if you look at them too hard and then they clear up when you brake again.

And some surface rust doesn't fail inspection. For that we clearly are in not-working-properly-and-potentially-a-safety-hazard territory.

Yes, I tend to agree, it sounds fishy, but I don't speak Germany but from the google translate of the TUV site and then some accounts of people here, it sounds like they do fail for normal surface rust. One or two people mentioned anecdotes that the inspectors have told them to go drive around and brake heavily before coming back.

Yes, you do that drive around to remove surface rust and allow the inspector to peoperly inspect the brakes. This drive around is not recorded as a failed inspection, if the brakes fail after, then it is recorded.