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It will mean every server will have to use Microsoft Windows..... Thus, handing over all control over the EU networks to 1 American company.

Nope, Windows Server would be illegal in Europe. Microsoft ships too much non-trivial FOSS software in Windows now.

There is no major OS that they can run, nor can they develop for it (the act of installing GCC or LLVM would now be illegal, for example).

I'm pretty sure Microsoft could compile software in the US and export it without the compiler.

Other issues could be solved with a Microsoft Windows 11 EU Edition that only allows programs to be installed from the Microsoft store.

FOSS is shipped by Microsoft on the Microsoft store. It, too, would be illegal.

Microsoft can simply ban FOSS from its store.