Their reason was that because the UK allowed me to fly the aeroplane, they would too
IMHO, under ICAO, they have no choice but to allow it. Otherwise, a US 747 captain could not fly an N-reg 747 into the same places.
An interesting quirk was that had I not been an EU resident, the DGAC would NOT have allowed this
I wonder how they get away with that. They have no right I know of to restrict privileges in a G-reg according to where in the world the pilot lives. AIUI each ICAO state can prevent its own nationals (not sure whether this means residents or citizens; I am still looking for the ICAO reference for this) exercising the privilege of a foreign license in their own airspace, so the DGAC could prevent a French national flying on any license other than a French one (or presumably a JAA one) in French airspace.
My vague recollection of this is that the French allow an FAA PPL/IR to fly an F-reg, IFR unrestricted, so long as he is not a French citizen or resident, and for a limited period. JAA restricts this validation period to one year (I do have a ref for it somewhere). That sort-of makes sense then. But they can't go beyond that.