I'm all for encryption becoming the norm.
For legitimate law enforcement needs, search warrants and traffic analysis are not impeded.
Umm... yeah, actually I think they are - if Big Content can't snoop on your communications, neither can Big Brother (whether you think this is good or bad is another matter entirely).
Actually, what they're talking about isn't widespread encryption (that's already in place, e.g. SSL), but widespread anonymity. P2P over SSL is no more secure from a record label sniffer than P2P over cleartext - they just attack the P2P network (that's what they do today - they're not actually doing network monitoring). What the British are afraid of is widespread anonymity (like Freenet, for example) - and with that, neither law enforcement nor Geffen records can see what you're downloading or uploading.
That said, they have nothing to worry about. Widespread anonymity will never become the norm. Any truly censorship-resistant scheme, whatever it may be, will be resistant against ALL censorship, not just selective censorship. So if you believe that .mp3's and scientology documents should not be censored, but porn should, you're out of luck if you want a technical solution. And the (sad, IMHO) fact is that most people support censorship of at least some things and will never buy into a system that makes this impossible.