As you've probably gathered, European HSE Regulations can be a minefield. The UK are reasonably dilligent in taking European legislation and converting it into UK policy. I've just reviewed "Managing health and safety in swimming pools (HSG179)" (yawn !!) which is the current UK based legislation for all swimming pools (inside, outside etc). Unfortunately, I can't give you a link to it as it is only accessible via registered users (my wife is a qualified SHE professional). There is absolutely nothing specific within this that requires pool edge barriers, which is a good indication that the European regulations almost certainly don't contain anything specific either.
The problem is, that doesn't stop other governments (Spain), local authorities (Andalucia) or even local town halls (Marbella) applying their own interpretation of the guidance.
An example of this is what we see now in the UK around Xmas time with illuminated Xmas trees outside pubs etc. Almost all of them now have unsightly, temporary metal or wooden fencing placed around them. There is no specific European or UK legislation requiring this, it's just local councils being particularly risk averse as a result of the current claim culture. There is also a degree of uninformed copy-catting.
Back to the the pool !!.... HSG179, like other HSE guidance, is not a compendium of legal requirements. It is simply intended to help pool operators meet the goal-setting requirements. Following the guidance should ensure that you are complying with the law, but it is not compulsory and other action can be taken to achieve compliance. The overarching duty is to prevent exposure to risk so far as is reasonably practicable. This does not mean operators should incur disproportionate costs in implementing measures that anticipate relatively remote risks.
Obviously, the inspector has performed a risk assessment on the pool area and the fence is the result of his recommendations. It would be interesting to see the associated risk which generated the need for the fence. It could be argued (as you have done) that, overall, the risk level has actually increased.
If the fence is to prevent accidental falls into the pool, this could be achieved by a suitable boundry around the greater pool/garden area, with access gates etc. The, one we use at La Manga is like this, with a high fence and with a key entry gate. On the gate there are the usual pool rules (no running, no unattended children etc). The argument would be that if you have made the conscious decision to enter the pool area, you are aware that there is a pool there...... with some water.... which will be wet !!!
Although HSG 179 doesn't cover the need for pool boundaries, there is a small bit of guidance relating to minimum spaces around pools to avoid congestion... something along the lines of: "The pool surrounds and other circulation areas should be designed so as to ensure the free flow of bathers and the avoidance of congestion. A minimum surround width of 2 m is recommended, but it may be possible for a narrower width to be used safely in some circumstances". In your case there is virtually no room.
It could also be argued that the introduction of the fence so close to the waters edge discriminates against disabled (wheelchair) users, who may benefit from a more uncluttered entry.
Regarding lifeguards, it depends what the fence is there for. If it's for while people are using the pool, then a lifeguard should remove the need for it. If it's there to prevent late night revellers from inadvertently falling into the pool, then a lifeguard will not change this risk (but a boundry wall would).
Regarding the island, I can see the logic here. The island should act as a "resting" point if a swimmer becomes tired. With a sloping surface, the tired swimmer couldn't necessarily hold on in a panic, whereas they could lean onto a flat surface. The best solution for you here would be to maintain the slope, but add a chrome rail (on the slope) for tired swimmers to hold on to. Additional UK guidance is to also have a recessed, underwater foot ledge at these "rest" points. Aesthetically, this wouldn't be an issue for you.
Lots of issues.... and at the end of the day, if the local legislators want to apply rules, it may be difficult to change this. Probably the best approach is to try and work with them to look at the most cost effective way of minimising all the associated risks.
Hope this helps