I think we're overlooking Ramirez.
Sure, Harry has pull with young wizards, but he's also scary. But he had unscary friend young wizards. And if ALL the cool young wizards like him, can he be THAT bad as the Merlin wants you to think?
Ah, but then BG (and cold case) happened. Suddenly Harry is annoying Ramirez at every turn (hanging with 'ooh the virgin snack' Raith, 'I kicked you to a pulp' Carpenter, and to boot messing with his cloak for no good reason), and then all his friends died. Ramirez, too, is utterly beaten up and angry at Harry and his friends.
So now the Merlin can make his powerplay without annoying the 'cool kids' too much. They'll still swing mostly back around because, well, Harry IS on the right side (mostly, see getting burned by Butters) - but for now there was bad blood, and a political animal like the Merlin smelled it.
And if Harry had accepted their ridiculous terms... well then he wouldn't be more unconstrained than he was as a Warden, either. Being able to make Harry Dresden do your bidding would've done plenty to offset not having Harry Dresden around to come kick them.