So glad you had the conversation, Rolypoly, and that it went well. I'm also glad DS (dear son) realizes his child should be his responsibility. While it's not unusual to let a SP (step-parent) do some of the parenting, IMO, the bio parent needs to stand up for their child if the SP is being abusive.
It's possible DS' partner did not realize she was committing emotional abuse. She might have thought she was supposed to correct the child, and just didn't realize she has been doing it too often/about too many things. Or she may have a lot more/stricter priorities than you do, Roly. Also, given her lack of experience in raising children, chances are, there are things she really doesn't understand. She may get quite a big surprise if/when she has a child of her own.
Then again, she may be the mean, spiteful person some posters have suggested. She may be jealous of GD or see her as a reminder of your son's X.
Regardless, as others have said, the child has to come first. It was very brave of you to go to DS, and, IMO, GD is very lucky to have you in her corner. I just hope DS' partner listens to him and that this all doesn't backfire on you. You've taken a big chance, but, IMO, it was worth it for GD's sake.
If his partner changes her behavior towards GD, wonderful! If she doesn't, please keep being a positive, loving, encouraging force in GD's life. I like the suggestion of having her overnight, as often as possible, and building her self-esteem whenever you can.
Please let us know how things turn out.