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I doubt that many European government organisations would be allowed to use a SaaS app provided by a US company, purely for data protection reasons. There are rules surrounding where personal information may be stored - due to, among other things, the USA PATRIOT act, the US is not usually an option for organisations that deal with personal info.

Can't you run a private installation of Google Docs?

No, there's no Google Docs "appliance". It's their cloud or nothing.

In fact, I think Microsoft is trying to push into that niche with their Office 365 which complies with European Privacy law. An opportunity Google might just have missed.

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