People want local news and content, because they have lives outside of the Internet and they want to consume (at least partially) content that relates to their lives. How would American content creators create Australian local content without operating in Australia, and fall under Australian regulative protections?

I think it's Google's position that the vast majority of people who go to Google's website don't actually go there to see the news. Hence why they're willing to remove news from search results all together. The regulation trys to prevent that, which is why they will have to remove their servers from AU.

Call your local newspaper and ask them about their subscription rates.

Wanting and being willing to pay for are two entirely different things.

I don't think many of them would be truly devestated by having to move outside of Australia to continue making content about Australia. The layer of abstraction might be good for them mentally

Being within Australia for "left-wing" creators like "FriendlyJordies" or "Juice Media" seem to be just a way to attract the Eye of Sauron from the right-wing media pundits and websites like "Junkee" that are heavily sponsored by large banks and fossil fuel companies

3. Australians barely notice.

Searching for "plumbers in my area", "hospital near me", "Bondi Beach weather this weekend", "2021 Australian federal election" all starts to break or show dated results. Latency won't be the problem, relevance will be the problem.

My guess would be that Australian regulators could consider it as Google trying to play a loophole around their rules, so Google could be forced to exit the Australian market altogether.

Though I, personally, doubt it will get to that. Either Google will come to a satisfactory solution that won't piss off the Australian regulators or pre-emptively exit the market