I agree with most of what you two said, albeit solely on a theoretical basis. The EU (or rather its member states) could freeze assets, issue warrants or hold fiduciaries responsible -- but let's keep it real here:
a) The 'international community' never ostracises even the maddest of tyrants until their time in power is clearly running out, only then enacting said measures for fear of losing business; even if e.g. Facebook's importance on the EU's economy is obviously nowhere near e.g. Gaddafi's, most European companies still consider social networks to be a valuable communication tool nowadays, be it through astroturfing or genuine customer care. Being unable, as in forbidden by law, to do business on the already established and popular ones, which in effect are all US-based right now, could quickly become a competitive disadvantage compared to their non-European competition who'd face no such restriction.
b) Sure, a pan-European substitute for Facebook might be created, possibly even with the help of billions of EU money in subsidies, just to prove a point, but would it - realistically - be accepted on a pan-European level as well? There are currently 23 official working languages recognised by the EU, but no real lingua franca, if you don't count broken English. In most European countries or language areas there already are local/national social networks that challenge Facebook on per-capita numbers, but what they are largely missing is the broader scope of, for instance, being able to discuss world events, your favourite sports league's result or even your kittens with someone you couldn't meet in your corner cafe anyway, a restraint sailing around which Facebook seems to manage better in comparison, despite (or because of?) the language barrier.
c) Even if the issued legislation was meant to protect EU citizens from abuse, the public opinion about it could nevertheless turn against the parties/politicians propagating measures to enforce it, be it the banning of entire sites (which, as /. comments prove, never goes down well with certain demographics) or just preventing your auntie from buying virtual sheep for FarmVille. It's not like anyone who has any insight is holding any politician in high regard anymore, and for sure whoever controls the means of communication used by the majority of the electorate has a certain power to influence the vote henceforth.
The voting masses are not that stupid anymore, I hope, that at least some of them won't notice the hypocrisy of politicians who not only postulate that almost infinite retention of internet, telephony, flight, account, ... data by state agencies is fair, just and in any case necessary, but who also agree to sharing it freely and warrantlessly with United States and other authorities (for the cause of the war on terror, that goes without saying), while at the same time keeping up appearances of fighting for the citizens' privacy against evil foreign economic forces who are willing to violate your innermost sacrosanctity just to make a fast buck.
Seems more like an egomaniacal turf war to me.