I am finding it very difficult to get my head around the legal aspects of this. What EASA seem to be saying is that if you are a resident of an EU state you will not be legally able to fly say an N reg aircraft based in the EU without an EU licence. That seems to fly in the face of the ICAO conventions and the very basic world wide principle that if the state of registry of the aircraft and the state of issue of the licence match then you are legal. What then happens if the FAA licence lapses (either by expiry or by failure to have a BFR). The pilot is then entitled to fly an N reg aircraft on say an EASA licence within the EU?
Since under the same conventions the state of registry retains huge amount of jurisdiction over its aircraft, there is surely a risk that this would then be illegal under the laws of the state of registry. Or, are EASA saying that in effect you must be dual licensed to fly non EU aircraft inside the EU, but only if you are permanently resident? How exactly that will be enforced is anyone's guess as a simple ramp check is unlikley to throw up any illegality.
This does not just relate to N reg. The Isle of Man is not part of the EU! Nor is Norway, Iceland, Switzerland. What of RA registered Yaks?