First, it's not about private files, it's about distributing content.
Google isn't spying on your private files, but does scan them when you share them publicly. E.g. keep all the pirated movies you want on your Drive, and even give private access to friends, but the moment you make them publicly viewable Google scans them and limits access accordingly. So no, this isn't applying to your private diary or privately shared documents.
And second, to those who claim absolute free speech with no limits -- notice that the two main categories here are related to democracy and health. All our legal protections ultimately depend on a democratic foundation -- undo that with misinformation and you don't have anything anymore. Similarly, your rights don't matter much if you're dead. Companies aren't allowed to advertise rat poison as medicine and neither are you.
No.
It's going to be a minimum wage indentured Google servant that doesn't quite understand what they are reading but they have 17.5 seconds per case to make a decision. They will shoot first and ask questions later. What if the document is satire but they couldn't understand it? Oh well there goes one strike against your account, or maybe that's your third strike and now ALL your Google accounts are banned.
We already know what the appeals process is like. Unless you get it publicized on Hacker News et al, you won't get any chance to appeal.
Overall I thought it was great and I wonder how good it would perform these days with 10 years of improvements!