Does anybody know why the JAA does not recognise FAA licenses that have been issued before the JAR's became effective (grandfathered)? Is it just a political thing?

It was possible to do this before JAR became affective. For example in Finland JAR-FCL2 became affective 01.01.2000. If you had begun to convert your FAA licenses before this date you were able to convert them quite easily.

The point was that you had to start to convert the licenses when the old national system was still in use ie. before 01.01.2000. If you just started the process before this date then you had (I think it was) 2 years to finnish up the conversion.