At this point I'm wondering what happens if the EU invokes their malicious compliance clause, and tells Apple outright what to do. Will they just refuse and hope they don't lose the EU market?

I think one point lost in most of these conversations is that the existence of an open iOS will spawn a lot of "change your region to Europe" how-to articles in the rest of the world, creating an escape hatch from the walled garden (and finally a good reason to use a VPN), similar to what Apple keeps attacking sideloading for. Maybe they'd rather keep control of their other markets than be in the EU one.