I guess MS could just find a way to guarantee that any data is only stored in data centers in Europe. It shouldn’t be too complicated and I don’t see how could they be considered to be a foreign cloud then.
Can the US government still force them to violate that guarantee? If yes, then they're a foreign cloud.
But then that would apply to every company that has datacenters and provides services both in US and Europe?
I don't think so. The US government could kill Microsoft; no European government could. The EU / some European government could kill a European company; the US couldn't.