If the U.S. government investigates Microsoft demanding they turn over info about their U.S. operations, Microsoft will say sorry, that data is stored in Europe. The U.S. will then have to go through the European legal system to get their hands on their data. Same if Europe asks for data on Microsoft's European operations. Microsoft says it's stored in the U.S. And they have to petition the U.S. government before they can get their hands on the data. The company gets double-protection - in order for a government to subpoena any corporate data, they have to first clear it with their court system, then clear it with the court system of the country where the data is stored. Both countries' courts have to agree to release the data before it actually gets released.
I don't know what the solution is. But it's not as simple as you're making it out to be. The relevance of the data to the country requesting it somehow needs to be taken into account.