Having the service provider handle the encryption is very convenient for the users. And, it turns out, the government.
To give a simple example: imagine a script that constantly dumps /dev/urandom into JPG-like files nonstop onto a 16 TB disk, then repeats. I've seen enterprise systems that aren't so dissimilar. If indeed the EU commission wants all files scanned, then will Hetzner need to spy on all of their machines at least enough to check for compliance? I'm guessing their board members think it can't possibly be so dumb, or stand to gain handsomely and privately.