Microsoft has done the leg work for this already. They currently have a completely contained Azure environment in Germany. I think it was deployed to ensure compliance with german/EU health data protocols.
I have first hand experience of this, migrating between their global PaaS and the contained German one. The bulkheads are quite air-tight (much to my personal detriment).
They also had a completely separate o365 offering called Microsoft Cloud Germany that failed due to lack of interest (and the fact that it was years behind the global platform, I say), which was finally shut down last year, with everyone who renewed their contract automatically being migrated off.
They're working on it, but still not everything is entirely regional.
I have first hand experience of this, migrating between their global PaaS and the contained German one. The bulkheads are quite air-tight (much to my personal detriment).