It is a multi-faceted issue. In general, for really sensitive content, like nude photos, keys etc., I'm very strict they should always be stored in an encrypted form and never ever decrypted on a remote machine.
Other content, private but not sensitive, like holidays photos, can be stored and decrypted remotely and it's a good practice to use encrypted partitions by default. I don't believe Hetzner would do any of the grey things that Google, Facebook and now Apple are doing (i.e. actively scanning your data for advertising and other purposes), but there is a practical problem of broken hard drives - it doesn't matter if it breaks in your place or at a hosting provider, you have a hard drive that is broken but you can't remove your data from easily, but someone else might. I estimate the probability is extremely low, but there is very little downside and effort required to encrypt data partitions nowadays, so I don't see why I shouldn't do that.
As for the interception of data in transit, nowadays everybody is using TLS for everything, so I don't think it's an issue.
Other content, private but not sensitive, like holidays photos, can be stored and decrypted remotely and it's a good practice to use encrypted partitions by default. I don't believe Hetzner would do any of the grey things that Google, Facebook and now Apple are doing (i.e. actively scanning your data for advertising and other purposes), but there is a practical problem of broken hard drives - it doesn't matter if it breaks in your place or at a hosting provider, you have a hard drive that is broken but you can't remove your data from easily, but someone else might. I estimate the probability is extremely low, but there is very little downside and effort required to encrypt data partitions nowadays, so I don't see why I shouldn't do that.
As for the interception of data in transit, nowadays everybody is using TLS for everything, so I don't think it's an issue.