Even before three current and former Google executives were convicted of violating Italian privacy laws, it became clear that the case was a double-edged sword.
The Italian court found the executives - David Drummond, Peter Fleischer, and former chief financial officer George Reyes - responsible for violating the privacy of a child with Down's syndrome, after a clip of students in Turin bullying him appeared on Google Video. Two months after the video was uploaded, and 5,000 views later, Google removed the clip on the request of Italian police, but the court said that wasn't soon enough.
Pretty much every pundit I've read - and Google itself - says the court decision sets a dangerous precedent, because every website in Italy now becomes responsible for filtering user content to protect privacy. The "open internet" is threatened, and so on. The implication is that sites like YouTube couldn't exist, but what it actually means is that YouTube and Google Video were in trouble even if they could have accommodated Italian law.
Hypothetically, let's assume Google could have a mechanism for vetting every video to protect privacy. It's generally agreed that this is impossible, but let's say Italy was a big enough market for Google to put its crack engineers on the case and figure something out. Inevitably the company's filtering process would put a lid on content that actually should be seen, in the interest of playing it safe. And no one would ever know about it.
The ability for user-submitted content to be vetted in the public eye is crucial, as proven by cases where Google has removed videos in response to complaints, then restored them due to an even more overwhelming response. Examples: footage of the Israeli Military's air strikes on Gaza, a clip of prisoner abuse in Russia, and videos of torture in Egypt. Privacy wasn't the issue in those cases, but they still show the importance of letting the public have a say in what gets seen.
So in light of the Italian court decision, Google's options were to self-censor its video site (or obliterate it completely), or go to jail. Hopefully Google can win the case on appeal, and end the madness.