The German regulators reportedly say they want to see the extent of the data collection for themselves. The regulators also presumably want to preserve evidence of Google's potential breach of the country's privacy law.
But it's hard to see how providing a foreign government with users' data protects them. After all, if Google violated people's privacy by spying on them, wouldn't handing over that data to the government violate people's privacy a second time? Clearly the consequences to individual users can be far worse once the government gets its hands on people's data.
Google, for all its power, can't actually arrest anyone. Or wiretap people's lines for evidence. For that matter, Google -- and other corporations -- can't actually violate people's rights to free speech, or to be free from unlawful searches and seizures. Only the government can.
While it's possible that the privacy authorities in Germany would be required to keep secret any information that they learn about individual users, there are no guarantees. The more people who have access to information, the more likely it is to become generally available.
Ultimately, the reason why people care about privacy is because they don't want information about themselves shared with third parties. If Google collected data that's never been used, and that can be destroyed without ever being seen by others, then doing so appears to protect people's privacy more than turning it over for inspection.