I don't know why watch-only wallets need encryption, they must have added that feature based on requests.
As Pooya has suggested, it is because it allows you to put a password on your wallet file so that if someone has access to your computer they cannot see your balance and/or transaction history.
Currently, as soon as you launch Electrum it will attempt to open the last wallet file that was used. If this happens to be your hardware wallet file (or watching only wallet), it just automatically opens showing all your addresses, balance and transaction history.
