So in short Google wants to use merchant's product images, which they've worked to produce or paid for as generic product images without compensation and if merchants don't like it their account is banned.

Google wants to use them according to the agreement that the merchant signed.

And that's why I'll be cheering the EU regulators that will sue Google into the ground should their shoppy-thingy ever gain the marketshare of Amazon or Google search.

They will sue them for preventing merchants from putting watermarks on their images? I find that hard to believe.

No. They would be sued for forcing merchants to let Google and others use their copyrighted material using the threat of banning them from the store. But that is only relevant if they are one of the dominant players.

The reasoning is that they would then be using their market dominance to force merchants to forego their (IP) rights, which is in conflict with EU anti-trust regulations.

But why do say they force the merchants to give up their IP rights?

> without compensation

Clearly the merchant must be getting something out of the arrangement, or else they wouldn't be concerned about Google walking away from it.

This. Search for a product in google shopping and multiple merchants will be clustered around one product image that is chosen from 1 of the merchants. That's the main reason, but it also avoids the ugliness of an ebay search where seemingly every other merchant has bright/bold text claiming free gifts or other such offers.

>the image can be used for a product that is sold by multiple merchants.

This is the issue. There's no incentive for me to invest a huge amount of capital to create good product images if I'm forced to basically give them away to my competitors.

The end result for Google shopping will be lower image quality because you've created a disincentive for us to create better looking images.