http://googlepolicyeurope.blogspot.com/2009/10/navigating-europes-streets.html

Starting today, we will permanently blur images on our internal database within one year of their publication on Street View. This means that long term the only copy we keep will be the blurred version. In countries where Street View is already launched the year long retention period will start today.

For reference, the followin was Google's original explanation of why they don't blur images internally (perhaps one year could be interpreted as a compromise between the different needs):

<<When a takedown request is filed, the images will no longer appear in the public domain. This also means that images of this location will not reappear even if we gather updated imagery of the area. However, we have in fact had people request to re-instate images (such as a new resident of a specific home) so retaining the image allows us to do so. Additionally, retaining images is important for our work to improve and refine our tools such as automated blurring.>>
http://blogoscoped.com/archive/2009-04-28-n21.html