portuese (2009)
TRANSCRIPT
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Law and Economics of the
European Multilingualism
Aurlien Portuese
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Content
Abstract...p.5
Introduction........p.6
I. Law of Languages in The European Union......p.6
II. Economics of Languages in The European Union............p.7
Part A: Cost-Benefits Analysis of the European Multilingualism......p.8
I. Institutional and Policy Cost.........p.9a. Linguistic Cost in TheEU Institutions......p.9b. Language Teaching Cost........p.10
II. Production Cost.....p.11a. Overview of the EU Language Law on Labeling...p.11b. Economic Analysis of the EU Language Law on Labeling.p.12c. Cost of the EU Language Law on Labeling.....p.14
III.Competitive Cost...p.14a. Language Barriers to Entry...p.14b. Cross-linguistic Market Entry Decision...p.17
. The Linguistic-based Bias.......p.17. Language Distance as Psychic Distance.....p.17
c. Cost-Benefits Analysis for Cross-linguistic Market Entry DecisionIn a Nutshell...p.20
IV.Contractual Cost....p.21a. The Multiplying Effect of Language Barriers on Transaction Costs...p.21b. Language Barriers as The Major Impediment to EU Cross-border Contracts................p.22c. An Economic Analysis of Multilingual Contracts..p.22
V. Innovative Cost......p.23
VI.Immobility Cost.p.26a. Language Barriers to EU Mobility.....p.26b. Languages in The Workplace.....p.27c. Discrimination Economics and Language Economics......p.28d. The Cost of The Non-EU Labour Market..p.28
VII. Criminal Costp.29
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VIII. Political Cost.p.30
IX.Benefits.....p.31
X. Preliminary Conclusions...p.32
Part B: Linguistic Coase Theorem.p.33
I. From Coase Theorem to Linguistic Coase Theorem.......p.34a. Overview of The Coase Theorem......p.35b. Overview of The Political Coase Theorem......p.36c.
Linguistic Coase Theorem......p.36
II. Normativity of The Linguistic Coase Theorem..p.37
III.Predictive Power of the Linguistic Coase Theorem ....p.39a. The Externalities of theCurrent Multilingualism..p.39b. Pareto-Optimality Applied to a Lingua Francap.39c. The OptimalLingua Franca in The Real World...p.40d. Literature Concerning The Choice of EU Lingua Franca...p.42e. The Reciprocal Nature of The Lingua Franca Problem...p.44
. Initial Entitlement of Rights on The UK.....p.45
. Initial Entitlement of Rights on The Continental Europe....p.45
IV.The Challenges of The XXIst Century Europe: Competitiveness And Democracy....p.48
Table of Cases..p.49
Bibliography.....p.50
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July, The 28th of 2009
Hamburg.
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Abstract
The economics of language applied to multilingualism in the European Union (EU) has
only recently come to the fore. Languages economics and Law and Economics disciplines both
emerged in the 1960s. However, no study has, hitherto, linked these disciplines. This paper
intends to fill that void.
Language barriers are the last major remaining barriers for the EUs 'single' market. The
lack of coordination of multilingualism in the EU stems from a taboo crystallized by a dilemma
between economic efficiency and linguistic diversityi.e., the maximization of wealth versus the
maximization of utility. The EU Member States (MSs) do not hasten to coordinate their language
policies at the EU level inasmuch as they overestimate the benefits of the current EU
multilingualism while drastically underestimating its costs. Coordination shall will only occur
when MSs evaluate the costs and benefits of the current EU multilingualism. This will uncover
the aforementioned dilemma, that will only be resolved when both Law and Economics are
applied. In pursuing this objective a Linguistic Coase Theorem adapted from the work of
Parisi and the Nobel Prize winner, Ronald Coase is elaborated .
Having outlined the basic notions deriving from the EU Law of Languages and the
Economics of Languages (Introduction), the paper scrutinizes the costs and benefits incurred by
the current non-coordinated EU multilingualism (Part I). Subsequently, a 'Linguistic Coase
Theorem' is elaborated in order to reach a Pareto-optimal outcome, thereby solving the dilemma
both economic efficiency and the linguistic diversity being enhanced (Part II).
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Introduction
I. Law of Languages in the European Union
The EU law of languages is governed unanimously1. The official languages of the EU
institutions are the official languages of the MSs, each linguistic version of EU law being "equally
authentic"2. Linguistic rights are enshrined for correspondence with the European Institutions and
its Bodies3. Cultural/linguistic diversity4 is promoted through the actions of the MSs.
In secondary EU law, Article 1 of the Council Regulation 1/58 of 1958 5 lays down the
principle of equal treatment of all official languages of the MS. Correlating the Article 314 in
primary law, Regulation 1/58 has established linguistic equality between the official languages of
the MS, although "a principle of general linguistic equality is not explicit"(Creech 2005:14). Recently, the
Council recognized that the Council is "attached to the fundamental principle of equality of the official
languages of the EU as enshrined in the Council Regulation N16. The European Court of Justice (ECJ),
ambiguously, expressed its commitment to the linguistic equality principle, when giving
approvals to the unequal treatment of some languages8 (Creech 2005:32-38)7. In reality, despite a
formal principle of equal treatment, the EU law of languages de facto hierarchizes languages
(Creech 2005:44) as follows:
1. English
2. French
3. German
4. Spanish, Italian
5. Bulgarian, Czech, Danish, Dutch, Estonian, Finnish Greek, Hungarian, Latvian,
Lithuanian, Polish, Portuguese, Rumanian, Slovak, Slovenian and Swedish
6. Maltese
7. Irish
8. Turkish and Luxemburgish
9. Regional and Minority Languages (RM languages)
II. Economics of Languages in the European Union
1Article 217 of the Rome Treaty, Article 290 of the Nice Treaty2
Article 248 of the Rome Treaty, Article 314 of the Nice Treaty.3
Article 8d of the Amsterdam Treaty, Article 21 of the Nice Treaty4
Article 149 of the Nice Treaty5
Regulation 1/58, O.J. (1958) 017/385.6
Reply to Written Question E4099/00 (2001) C23E/687 Case T-120/99 (2001) "Kik v. OHMI"with a dismissed appeal in the Case C-361/01 P (2003) "Kik v.OHMI"; Case C-42/97 (1999) "Parliament v. Council".
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Through the embodiment of knowledge (Astley and Zammuto 1992:445; Hocevar 1975;
Breton 1978), language is the prerequisite medium for the transmission of information. Any
language is tied to information, and is priced by the market according to its actual/potential
information value determined by the importance of its network of speakers, this determining its
usefulness(Grin 2005:61).
A language's objective value (price) is manifested by higher earnings for multilingual
workers (Vaillancourt 1980; Grenier 1985; Vaillancourt 1991; Ginsburgh and Prieto-Rodriguez
2006). Language is understood as a "hyper-collective"good (De Swaan 1993) being neither a rival
nor an excludable good, its value increasing with its use. This flows from the existence of
network externalities in languages. An individuals utility is an increasing function of the number of
people with whom one can communicate(Church and King 1993:338) creating a positive externality
towards a language, and inversely, a negative externality towards other languages, with the
extreme consequence of a "linguicide"(Crystal 2000; Phillipson and Skutnabb-Kangas 1995).
Languages are capitalized as human capital (Becker 1964; Grin and Vaillancourt 1997) since they
encapsulate its three features i.e. "that is productive, costly to produce, and embodied in the person"
(Chiswick 2008:4). Language skills reduce transaction costs by reducing informational costs.
Although a speaker of a language has communicative interests in having a large linguistic
community (Selten and Pool 1991:67), the inclusion of a new member in that community might
reduce its human capital by the reduction of comparative advantage in the labour market.
Speaking a lingua franca gives less 'monetary benefits' compared to its communicative benefits
(Selten and Pool 1991:67) and becomes merely a requirement (Grin 2005:44; Ginsburgh and
Prieto-Rodriguez 2006:13).
Although not all languages have a market value, every language encapsulates an
economic subjective value, since the use of each language delivers to its speakers a utility. The
total value of a languages is constituted by "marketable" (objective) and "non marketable"
(subjective) values (Grin 2005). Since economics is concerned with the maximization of utility as
much as with the maximization of wealth, linguistic diversity and economic efficiency are sought
whilst being mutually antagonistic.
An optimal level of linguistic diversity has to be reached given its cost (Grin 2005:28;
Grin 2002:28). The optimal level of linguistic diversity can encompass full linguistic diversity
maximization of utilitiesif the transaction costs within a multilingual environment are reduced
minimization of costs. Therefore, the reduction of transaction costs (costs of language barriers)
within the EU multilingual economy is the cornerstone for solving the aforementioned dilemma
involving linguistic diversity/economic efficiency.
The "language game" theory elaborated by Wittgenstein (1953) emphasizes the utmost
importance of reciprocity in the game played. Linguistic conventions must be reciprocally known.
The payoffs of players are inter-dependent across linguistic communities while being
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independent within a linguistic community (Selten and Pool 1991:68). The best strategy for a
rational player in response to another players move to learn a specific language is to learn this
same language, thereby maximizing her communicative benefits (Selten and Pool 1991:67) while
minimizing the actual and probable information costs. Finally, a lingua francaemerges.
Carr (1985) explains the rise of a lingua franca by comparing common language to a
common currency, considering language as an information-carrier. However, the multiple
purposes of languages, the language-specific investments, and the subjective value attached to
linguistic diversity make the correlation hazardous (Grin 1994:32).
Languages have a lock-in effect because language-acquisition requires language-specific
investments as an additional knowledge. Because linguistic amnesia is unimaginable,
"multilingualism is a viable strategy"(Laitin 1993:235). A rational actor will learn a new language if the
expected returns of her current linguistic competence are smaller than the additional net
communicative benefits expected from a new language additional communicative benefits
minus learning costs (Selten and Pool 1991). The more the linguistic competences are constituted
by 'important' languages (e.g. English), the more one is locked into her linguistic repertoire, and
the more this equilibrium is stabilised (Gabszewicz et al. 2008:3). In the domain of Behavioural
Law and Economics of Language, "stubborn beliefs" about language policies (Pool quoted by
Grin,2004:192) and status quo bias regarding language choices are made in the context of bounded
rationality(Luo and Shenkar,2006).
If there are two-players in a non-coordinated linguistic game, each player being fluent
only in the other players language, the equilibrium involves each player speaking her native
language in a receptive bilingualism (Pool 1986:165). The outcome is efficient (integral inter-
communications) but sub-optimal (Mackaay 2000:7; Pool 1986) with respect to the
overinvestment of both players in becoming bilinguals (Church and King 2003:340). Where
more than three official languages are involved, with the assumption of each player learning and
becoming fluent in one foreign language, non-coordination upon language choices brings about
non-integral intercommunication hence inefficiencies. A fortiori in the EU context, with 23
official languages and non-10 coordinated linguistic games between rational players, inefficient
outcomes are highly probable without a lingua franca.
Part A: Cost-Benefits Analysis of the European Multilingualism
Current EU multilingualism has never been subject to an analysis of the costs and
benefits incurred in the EU economy. Language-planning can no longer "eschew this core issue"of
cost-benefits analysis (Grin 1994:36) if rational decision making is sought. Obviously, the
presence of languages in the EU is not a variable, but the (absence of) a EU lingua franca is a
variable (a choice).
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I. Institutional and Policy Cost
a. Linguistic Cost in The EU institutions
The EU started in 1958 with 4 official languages, and nowadays has 23 such languages.
The institutional costs of managing the EU multilingualism represents "approximately 1.1 billion
per year", tantamount to "2.5 per citizen peryear"8. New languages bring small benefits in terms of
disafranchisment10. The number of pages translated increased 910 The addition of Irish costs
13,000 per minute of debate in the European Parliament although none of the 6 Irish MEPs
debated in Irish9.
from 1700 pages in 1958 to 1,700,000 pages in 200710. EU multilingualism represents at least
40% of the EU administrative cost (Haarman 1991:114).
If the EU law is inconceivable without translation11and since translating means choosing
(Caill 1967) EU multilingual law is in strictly legal terms [] inconceivable with it (Correia
2003:38). Non-monetary costs delay and error costs have to be taken into consideration,
although hard-data can hardly be gathered12. The problem of error cost is double: (i) error cost
occurs by the process of translation due to the trade-off between transparency and faithful
translation techniques which lead to the probability of errors; (ii)error cost occur due to the use
in order to reduce translation costs of intermediary languages. The more 'pivot' languages are
used for decreasing translation costs, the more error costs increase.
EU multilingual law incurs litigation costs over its interpretation, with a difficult task
delegated to the ECJ, which has adopted a supranational interpretative approach13. The ECJ
must interpret contradictory linguistic versions, thereby creating uncertainty costs for EU
citizens and enterprises.
b. Language Teaching Cost
8 Leonard Orban, Commissioner for Multilingualism, Interview of the 12th November 2008 forEurActiv.9
Source: http://archives.tcm.ie/irishexaminer/2008/01/21/story53174.asp 11
10DG Translations (2008). The hyperinflation in the number of translations creates necessarily
problems of uniqueness of meanings (Koutsivitis 1988).11
Hence the problems of the binding force of non-translated law (Bobek,2007)12
The delay cost can include the loss of lives. See The Guardian, July the 28th of 2004, Available at :
http://www.guardian.co.uk/business/2004/jul/28/politics.europeanunion13
Case 80/76 (1997) "North Kerry Milk Products Ltd. V. Minister for Agriculture and Fisheries"; Case
30/77 (1977) "Rgina v. Pierre Bouchereau"; Case 100/84 (1985) "Commission of the European
Communities v. United Kingdom of Great Britain and Northern Ireland"; Case C-449/93 (1995)"Rockfon A/S v. Specialarbejderforbudet"; Case C-72/95 (1996) "Aannemersbedrijf P.K. Kraaijeveld
BV e.a. v. gedeputeerde Staten van Zuid-Holland".
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Overcoming language barriers within the EU 'single' market has led to the3 elaboration
of EU programmes14 such as the Lifelong Learning Programme in 200615. Other educational
programmes, not especially designed for language purposes, undoubtedly contribute to language
learning and teachingsuch as the Erasmus programme.
We found that the average number of hours of foreign language teaching in the EU-27
is about 823 hours per year for primary and secondary educations16. The overall cost of language
teaching was roughly 60 billions in 2005 (Lukacs 2007:8). In comparison, the US has no
compulsory class for foreign languages. Only 8.6% of the students enrolled have followed
foreign language courses (Furman et al. 2007). Not only does the US spends much less public
money on language education, but the language education that is given delivers to the US a
comparative advantage compared to the EU, since the foreign languages taught open markets
located outside the American internal market, whilst language teaching in Europe is necessary in
providing access to its own internal market.
Regional and Minority (RM) languages have been denied EU legal status. This
political/legal choice reinforced the attrition process and endangerment of the more than 600
indigenous and non-indigenous languages spoken in the EU (Broeder et al. 2007:26-27). The EU
intends to promote RM languages through public intervention encouraging the supply of goods
and infrastructures in these languages, with a questionable low cost-effectiveness a policy-to-
outcome path (Grin 2002b:79). Grin and Vaillancourt (1999), although recognizing that private
demand is theprima conditio for the revitalization of RM languages, consider State intervention as
necessary for reducing the negative network externalities created by the major languages. An
alternative approach would be in focusing in enhancing the demand for RM languages a
'market-to-outcome path'. This alternative approach is proposed thanks to the overcoming of the
languages network externalities, causing the concentration of language-acquisition on a few
'important' languages. Motivation for a RM language (condition for its survival: Grin 1992) will
arise out if the subjective value attached to a specific RM language is taken into consideration.
When deciding to learn a language, the traditional trade-off between its communicative benefits
the positive network externalities and its subjective value must be halted in order to have an
enhanced demand for RM languages: individuals will maximize their utility by freely choosing to
learn an ethnic language. The perspective suggested shall avoid inefficiencies (i.e. oversupply)
14Article 126-1 EC Treaty.
15Decision 1720/2006, November the 15th of 2006. The "Lifelong Learning" Programme's2nde
Activity concerns "Languages and Language Learning" and has received in 2008 for two years
9,685,633. Hence, the cost of EU language programmes is approximately 4,842,826 per year.
Source: http://eacea.ec.europa.eu/llp/ka2/key_activity_2_en.htm
16European Commission, Eurydice, (2008)Key Data on TeachingLanguages at School in Europe,
p.93, Available at: http://eacea.ec.europa.eu/ressources/eurydice/pdf/0_integral/095EN.pdf
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since supply shall equate with the enhanced demand for a particular RM language.
In conclusion, all these institutional costs are illegitimate since their purporse the
equality of languages and the promotion of the European linguistic diversityare de facto either
violated (with respect to the illusion of language equalityTosi,2003:129) or merely ineffective (with
respect to the promotion of RM languages).
II. Production Cost
a. Overview of the EU Language Law on Labeling
The existence of EU multilingualism impedes the free movement of goods17. The
requirement of labeling products in the language of the MS where the product is purchased is an
obstacle to intra-EU trade. Goods have to be modified when crossing linguistic borders.
However, "the need to modify goods is itself a substantial barrier to market access18. Therefore, language
barriers constitutes barriers "having an effect equivalent to quantitative restrictions"19hence impeding
the free movement of goods by fragmenting the EU 'single' market into linguistic markets (in
most cases tantamount to the national markets). Nevertheless, this restriction is a lawful barrier,
justified by an imperative requirement20: the defense of the consumer demands that a product is
labeled in the national language of the MS in order to have full intelligibility of the product by
consumersmeaning, full information. The complex EU language law on labeling is characterized
by the lack of any systematic coherent view21: different directives regulate the labeling of different sorts
of products without rational justifications for these distinctions.
In the absence of a specific directive, EU language law on labeling does not require the
use of a particular language and allows labeling only through "designs, symbols, or
pictograms"22(Creech 2005:82). Despite such theoretical possibility, because of the complexity of
products and the intelligibility requirement in preparing products for consumer protection
purposes, it seems to us that it is only the recourse of a written language (viz. the national
language) that renders the protection of the consumers effective.
A 'migrant consumer' who purchases a widget tied-in a MS's language without her speaking this
language, is obviously not protected inasmuch as the product is labeled in a foreign language she
17Articles 28, 29 and 30 of EC-Treaty.
18Opinion of Advocate General Jacobs, 44 for C-412/93 (1995) "Leclerc-Siplec".
19C-8/74 (1974) "Procureur du Roi v. Dassonville" where the ECJ stated that "all trading rules
enacted by Member States which are capable of hindering, directly or indirectly, actually or
potentially, intra-Community trade are to be considered as measures having an effect equivalent to
quantitative restrictions".20
C-120/78 (1979), "Rewe Zentrale v. Bundesmonopolverwaltung fr Branntwein".21
Opinion of Advocate General Cosmas 56 for C-385/96, (1998) "Goerres".22 C-33/97 (1999) "Colim NV v. Bigg's Continent Noord NV".
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does not understand. Consumer protection requirement does not insist on having the product
labeled in the mother tongue of the consumer. The free movement of consumers is thereof
obstructed.
b. Economic Analysis of the EU Language Law on Labeling
The legal requirement of different labeling incurs two direct costs for producers:
Translation Costs: when the linguistic market targeted is important enough so that the expected
benefits outweigh the translation costs, producers shall decide to bear the translation costs.
Contrariwise, in the case of a small linguistic market, producers will refrain from translating. A
detrimental threshold for intra-EU trade is settled; The opportunity costs of missed scale
economies: the unlawfulness to produce and sell a particular product throughout the EU 'single'
market all at once disallows economies of scale. The fragmentation of the EU market into
linguistic markets concedes a comparative advantage to US producers who enjoy a unilingual
continental market. Therefore, after a lowering of their products marginal costs, US producers
can subsequently export their widgets abroad in so far as their costs are competitive.
Labeling in the national language of the MS where the product is purchased cuts the
'receiving informational costs' for consumers uncertainty and risk costs and/or translation
costs while creating 'emitting informational costs' for the producers translation costs. The
efficient solution is reached with the aforementioned requirement when the reduction in the
producers translation costs is greater than the reduction in consumers costs. Current EU
language law on labeling is efficient only when producers constitute the cheapest-cost avoider
(Calabresi 1970). Producers can avoid the damage (opportunity costs of non-trade) at the lowest
cost by pooling translation costs. Nevertheless, the current legal solution becomes inefficient
when either:
The damage is reduced/absent. Translation does not enfranchise moreconsumers. The less the disenfranchisement costs, the less the opportunity costs
from missed trade without translation; or,
The consumers' costs are reduced. Translation costs can be reduced, forexample, by the intervention of the State, whereas the uncertainty and risk costs
are reduced when consumers shift from being risk-averse to being risk-
neutral/favouring. This shift is either the result of the personalities of the
consumers, or the result of a pooling of risks.
The most probable cause of inefficiency of the current legal situation has to be found
whereby there is no consumer disenfranchisement despite the absence of translation. This
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situation is characteristic of multilingual States where consumers are fluent in the other
language(s) of the State. In these cases, the translation costs are greater than their expected
benefits reduction in consumers' costs because the translation does not bring about a
decrease in disenfranchisement costs. Multilingual consumers bear very small uncertainty and
risks costs compared to the producers translation costs. In these situations, consumers are the
cheapest-cost avoider.
As a result, the ECJ rulings "Piageme I"23and "Piageme II24 on the notion of "language
easily understood by the purchaser" derived from Directive 79/112, have to be considered from an
efficiency viewpoint. These decisions should not be extrapolated to monolingual MSs26
according to the efficiency rationale explained above.
Paradoxically, after having affirmed that "the fact that consumers in a Member State in which the
products are marketed are to be informed in the language or languages of that country is therefore an appropriate
means of protection", the ECJ judged in the "Crystal Glass" case25 concerning the validity of the
Crystal Directive26 that the requirement of labeling only in the language of the country in which
goods are marketed is "necessary". Here, the impediment to the free movement of goods is the
maximized since bilingual labeling in order to simultaneously sell products in different MSs is
prohibited. This judgment appears to overemphasize the need for consumer protection beyond
a point where the additional precaution costs more than its inverse additional benefit, and thus
leads to an inefficient solution. This wrongly judged decision might be explained on the grounds
that the ECJ was protecting a EU law, whereas in other cases national laws were the bone of
contention.
23C-369/89 (1991) "Piageme v. BVBA Peeters": the ECJ judged 16 that "the obligation exclusively to
use the language of the linguistic region constitutes a measure having equivalent effect to a
quantitative restriction on imports, prohibited by Article 30 of the Treaty". A producer in Belgian is
allowed to label its products only in French (or only in Flemish) and sell them throughout Belgium dueto the absence of consumers' disenfranchisement.24
C-85/94, (1995) "VZM v. Peeters NV": the ECJ affirmed that the Directive 79/112, within which the
notion of "language easily understood by the purchaser" is promoted, aims to ensure that the
consumer is provided with information rather than to impose the use of a specific language. The
preoccupation is the information, not the language which is seen as only an information tool. An
easily understood language is determined with respect of the similarity of words in differentlanguages, the widespread knowledge amongst the population concerned of more tha n one
language, the existence of special circumstances such as a wide-ranging advertising campaign or
wide-spread distribution of the product. On this latter criterion, concern can be expressed from the
viewpoint of competition policy. Indeed, detrimental effects are created since outsiders without well-
known products have to bear relatively high costs of translation and/or advertising, whereas theinsiders can afford to avoid these costs hence strengthening the comparative advantages of insiders.
For us, this criterion should not be contemplated by the ECJ. Accordingly, it is necessary to criticise
the ECJ ruling C-366/98 "Geoffroy v. Casino France"whereby Coca-Cola (the incumbent) labeling in
English (the linguistic hegemon) in France has been authorized not to translate the bottles in French
because they are "well-known"products.A contrario, outsiders will have to translate and/or advertise
because of their unknown products. 26 Opinion Advocate Generale Cosmas 50 for C- 385/96 (1998)"Goerres".25 C-51/93 (1994) "Meyhui v. Schott Zwiesel Glaswerke".26
Directive (1969) 69/493.
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Empirical researches regarding the organizational culture of firms have established the
importance of the language factor in the cultural barriers that firms encounter (Cremer 1993;
Schall 1983; Barley 1983; Lazear 1999). Concisely, and by syllogism, we shall say that cultural
differences are barriers to entry across MSs (Madsen 1994); language differences are the main
feature of cultural differences amongst Europeans; therefore, language differences are entry
barriers across MSs.
Linguistic costs are the costs of entry in a linguistically different market that fall upon
the foreign entrant, but not upon the local incumbent. Language barriers to entry are a specific
type of cultural barriers. The social cost of entry barrier is welfare detrimental. Entry barriers
have been defined by Stigler (1983) as the "cost of producing (at some or every rate of output) which must be
borne by a firm which seeks to enter an industry but is not borne by firms already in the industry"2830.
Language barriers are structural barriers which do not need the actions of the local incumbent in
order to deter or postpone the entry. These barriers are faced by potential foreign entrants who
do not speak the language of the target market. Inefficient outcomes arise when the least-cost
firm is blocked from entering the market.
Motta (2004:115) illustrates situations whereby language barriers are discernible, referring
to the media market where relevant markets are defined by linguistic boundaries29. The relevant
geographic market, independently of the transportation costs, will be the area sharing a common
language30. Translation costs and search costs (for interpreters and business contacts) can be
assumed to be similar, independently of language. Subsequently, the size and maturity of the
market matter. A producer located in a MS will compare the expected payoffs between entry in a
MS such as Denmark, and a non-EU market such as Russia. Ceteris paribus, if the payoff in terms
of linguistic costs/expected profits is higher for the Russian market than for the Danish market,
the producer will enter the Russian market rather than the Danish market. Not only is the EU
market fragmented, but also, EU producers neglect one or several markets within the EU when
a better payoff is attainable outside the EU.
Let us assume two firms aand b incorporated respectively in countries A and B, both
countries being monolingual with different languages. Producer aproduces its widget written in
A's language at the cost of 100 per unit. Producer bproduces the 'same' widget but written in
B's language, also at the cost of 100 per unit. Both producers' selling prices are 110 per unit.
effect of cultural barriers as non-tariff barriers within the EU market, and not focusing on oneparticular type of productnamely, foodstuffs products.28
We shall adopt this definition although Stiglers definition differs from the Bains wider definition.
See: Bain, J. (1956). Also, Demsetz (1982) and Von Weizsacker (1980).29
E.g. Decision IV/M.993 (1998) Bertelsmann/Kirch/Premiere where the relevant geographic
market was defined as being the German-speaking area; Decision COMP/JV.37 (2000) BSkyB/Kirch
PayTV".30
E.g. Decision COMP/M.2724 (2002) Royal Bank Private Equity/Cinven/Ambion Brick where the
relevant market as been defined as the UK and Ireland together.
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preventing or disturbing firms learning about and understanding a foreign environment", emphasizing the need
of acquiring information about the market and above all understanding them. Understanding is
evidently inconceivable if languages differences render the information unintelligible. Barkema et
al. (1996) emphasize the role of learning process in the internationalization of the firms.
Obviously, the learning process is facilitated (learning costs lubricated) when a common
language is shared (Melitz 2007). Psychic distance is an umbrella notion encapsulating different
elements, viz. "business practices, institutions, economic environment, industry structure and national culture"
(Evans et al. 2002). Due to the European integration, "national culture"as has become the major
feature of the psychic distance between MSs.
We shall understand "language distance" (West and Graham 2004) to wit, the
unintelligibility because of a mere language difference as a sub-category of cultural distance,
being itself a category of psychic distance33. Language distance is "bundled into the psychic distance
package"(Welch et al. 2001:194). We include the requirement of linguistic competence into what
Johnson et al. (2006:536) call the "cognitive cultural intelligence"of the targeted market, which plays
"an important role"in the concept of cultural distance. There could be no cultural intelligence of a
market without linguistic competence. Intelligence presupposes the mastering of knowledge after
a process of learning, a process that postulates a free flow of information. Psychic distance incurs
'psychic costs', consisting in the overestimation of risk costs. An illustration of psychic costs as
risk costs exaggerating factor is witnessed with banks offeringsmaller loans at a higher interest rate to
more culturally distant borrowers (Giannetti and Yafeh 2009). Perceivably, costs are dramatically
increased altogether with an expected benefits' decrease (Bartlett and Ghoshal 1989; Palich and
Gomez-Mejia 1999). Language distance incurs some "liabilities of foreignness"(Zaheer 1995) which
are "impediments to effective negotiations and alliance evolution" (Luo and Shenkar 2006:322). Whereas
languages are viewed as "keys to market understanding"(Williams and Chaston 2004:477), there is an
under-investment in learning foreign languages, leading to an inefficient equilibrium (Konya
2002).
Language distance has an influence on both the performance of firms34 and on the
equity entry mode choice. There is a conflicting literature in this domain. Researches have found
a positive relationship between psychic distance and companies performances the psychic
33Nordstrm and Vahlne (1992:10) concluded that psychic distance comprises "cultural [...],
structural (such as legal and administrative systems) and language differences". They classify
language distance as a category per se, not as a sub-category of cultural distance as we adopt. This
divergence is not significant for our purpose since cultural differences within the EU are limited for
market entry decision.
34Furthermore, language is a key determinant of the performance of a country in general. The more
prominent a country's language is, the greater the country's economic performance (Hall and Jones
1996).
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one common knowledge language for the parties and the court (Battigalli and Maggi 2008). In the EU
context, language differences raise the problem of translation costs. Translation costs are the
informational costs borne by contracting parties for overcoming language barriers.
a. The Multiplying Effect of Language Barriers on Transaction Costs
The language barriers have the effect of multiplying the transaction costs in each stage of
the contractual process. Because information is not lubricated between parties, the burden of
language differences will be endured throughout the process, from searching to litigation steps.
Mackaay (1982) argues that informational costs can be reduced by a tradeoff consisting of either
pooling risks or incurring searching cost up to point where the marginal cost of searching equals
the marginal benefit of reduction of risk cost.
From Posner s equation (2004), we can say that language barriers have the effect of
multiplying the transaction costs. Posner determines transaction costs in a contract as:
C = x + p(x) (y + z + e(x,y,z))
Where Cstands for transaction costs, xrepresents the negotiation and drafting costs,yis
the parties litigation costs, z standsfor judiciary costs, and erepresents the error costs. Linguistic
costs incurred for a multilingual contract multiply the overall transactional costs (where L is > 0
and represents the multiplicative coefficient of linguistic costs):
C = [x + p(x) (y + z + e(x,y,z))] (1 + L)
b. Language Barriers as the Major Impediment to EU Cross-border Contracts
Cross-border legal uncertainty about European contract laws incurs transaction costs.
This leads the literature to promote harmonization of the European contracts laws in order to
reduce informational costs. But harmonization of legal systems in Europe is only a tool for
lubricating cross-border information (Smith 2005). If divergence of laws creates uncertainty costs
(Ribstein 1996), legal uncertainty can only be reduced by the decrease of the informational costs
notably incurred by language barriers. The necessary informationthe foreign contract lawis
non decipherable due to the unintelligibility (lack of mutual intelligibility??) of the language.
Smith (2005) states that uniform contract law has not proved to be an efficient tool for increasing
cross-border contracts. The harmonization of contract law as such is not as important for the
enhancement of trade as governments or academics sometimes think(Smith 2005).
In the absence of a "language game", multilingual contracts are difficult to form.
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Wittgenstein (1953) explains that there are an infinite numbers of language games played between
actors. The promise game constitutes a particular family of language game. A contract game is
played, which is an institutionalized reciprocal promising game (analogized from Wittgenstein's
example of the marriage contract). No valid promise might be made when contracting parties do
not share a common language. Misunderstandings occurring when a common language is learned
might have sufficient weight so that risk-averse parties will decide not to enter into this language
game, notwithstanding a third language in commonwith both text and context (Van Dijk 1977)
being of importance. Lacking equal proficiency in a common language, inefficiencies due to the
"signing-without-understanding" problem arise (variant of the "signing-without-reading" problem, De
Geest 2002; De Geest et al. 2002).
c. An Economics Analysis of Multilingual Contracts
Multilingual contracts are particular sources of incompleteness since the three causes of
incompleteness (Tirole 1999) are emphasized in this context. Unforeseen contingencies, writings
costs, and enforcing costs are appreciably augmented. Contract incompleteness befalls mainly on
the basis of avoidance of the inflation of writing costs (Battigalli and Maggi 2001). Language
barriers substantially increase the probability of contract incompleteness, since drafting costs are
necessarily higher in multilingual contexts. But because of the reluctance to bear greater drafting
costs, parties shall either not enter into a multilingual contract or will accept greater contract
incompleteness with "interpretative mistakes"(Eisenberg 2003:1611).
As soon as one negotiator is "not truly fluent in a foreign language, [one] should not negotiate in
that language"(Craver 2005:440): the additional translation cost is smaller than the additional cost
of ex postmisunderstandings. Yet, overconfidence and "false consensus"biases (Solan et al. 2007)
hamper the recourse of interpreters, and misunderstandings will only be brought into the open at
the time of implementing the contract.
More frequently opportunistic behaviours will crop up since a party has invested in
language learning (or interpreters), whilst the other party did not. Information, as a "capital asset",
shares the characteristics of any"investment problem" (Mackaay 1982). Language investments are
language-specific investments (if not party-specific), as such being subject to opportunistic
behaviours from the other contracting party (all the more if party-specific investments are aimed
at understanding only this party). The non-investing party has gained bargaining power with a
credible threat to stop the pre-contractual negotiations. In order to have other possible
opportunities (risk-pooling), and to avoid sunk costs, only major languages will be learned. The
bargaining power of the non-investing party renders an unbalanced contract possible. The more
unilateral pre-contractual language investments are made, the more the investing party is subject
to an unbalanced contract at her disadvantage. Rational actors will anticipate this damageable
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outcome by under-investing in language skills, impeding the formation of multilingual contracts.
When the supplier has invested in learning the language of potential consumers, the supplier is
incentivized to distort information in her favour in the shadow of the consumer protection laws
(Mackaay 1982) the high verification costs disincentivize consumers to go through the
information supplied. With the assumption of risk-averse parties and aversion to contractual
exploitation, consumers are deterred from dealing across linguistic borders. Consequently,
language barriers impede cross-border contracts in the EU. Eleven percent of European SMEs
lost contracts because of lack of language skills (ELAN Report 2006). A European business is
estimated to lose 325,000 in contract value over three years due to lack of language skills. Often,
businesses are unaware of contract loss caused by under-investments in language skills. For
SMEs and for those aware of contract losses because of language barriers, the cost of lost
contracts is estimated for the EU economy to be at least 100 billion per year (ELAN Report
2006).
V. Innovative Cost
We shall here emphasize the cost of EU multilingualism for patenting in Europe.
Language issue is the main obstacle for the emergence of a Community Patent35. Nowadays,
patenting in Europe is a jigsaw puzzle36. The European Patent system is the most expensive
patent system in the world. Prohibitive patenting costs necessarily bring about a lower demand
for patents (De Rassenfosse and Van Pottelsberghe de la Potterie 2008; Mejer and Van
Pottelsberghe de la Potterie 2008). Despite the presence of high judiciary and renewable costs,
we shall concentrate on the existence of translation costs in the European Patent System.
These costs derive from Article 65 of the European Patent Convention (EPC) which
has been in force since 1977. Article 65 allows each MS to demand an exhaustive translation of a
patent into its own official language(s) by the proprietor. The EPC is a mere bundle of national
patent laws within a European institutional umbrella. The entry into force the first of May 2008
of the London Agreement (LA)part of the EPCcut the translation costs since a patent must
no longer be translated when written in one of the official languages of the EPC English,
French, and German. However, the LA does not answer the aforementioned dilemma involving
economic efficiency and linguistic diversity. Indeed, linguistic equality is denied in the LA due to
a legalized hierarchization (free-riding) of languages English, French and German being
privileged. This linguistic hierarchization may explain the small number of LA ratifications
amongst MSs having neither English nor French nor German as their own official language(s).
35The absence of a Community Patent damage 90% of the European businesses. Source: The
European Parliament of Entreprises, http://www.cebre.cz/en/news/new-147/3336 Commissioner Jan Figel to EUobserver, 18.12.2008: http://euobserver.com/879/27308
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The breach of the principle of equality of languages might be acceptable if the loss in subjective
value were compensated by greater gains in economic efficiency in order to outweigh this breach.
Yet, this is unfortunately not the case as we shall briefly explain.
For an innovator to patent in all the MS of the EU, the LA only partly reduced
translation costs. Indeed, only the filing (Article 1-3 a contrario) of a patent, and only between the
contracting parties (only ten EU Member States) was involved (Mejer and Van Pottelsberghe de
la Potterie 2008). The geographical limitation of the LA ratifications increases patent validations
by 29%, instead of the more than 59% that were LA ratified by all parties at the EPC (Harhoffet
al. 2009). To translate a patent into the 23 official languages of the EU cost more than 30,000
(Karoutchi,2001) since on average translating costs 1,700 per language (Van Pottelsberghe de la
Potterie and Francois 2006).
When the LA regime is applicable, the economic gains are totally insufficient in order
for the European Patent System to compete with other world patent systems. Under the LA
regime, and only for 13 European countries, a validation of a patent in Europe is still thirteen
times more costly than a validation in the US (Mejer and Van Pottelsberghe de la Potterie 2008).
If a patent is filed in only 13 European countries, the reduction in translation costs resulting from
the ratification of the LA amounts to 4,864 (Mejer and Van Pottelsberghe 2008). Hence, the
translation costs alone went from 13,600 to 8,736, whilst the overall cost for filing a US patent
and to protect it for 10 years is 12,125 (Van Pottelsberghe de la Potterie and Francois 2006). As
shown below, only the translations costs, and only for 13 European MSs, are greater than the
entire patenting costs in the US for a ten years protection, not to mention all other patent
systems in the world:
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require proficiency in the national language, but instead in a third language (e.g. English).
Nevertheless, such a faculty is infrequently exploited (except perhaps for academic positions).
The language requirement generates the non-appearance of a EU labour market, but rather, the
perpetuating of small national labour markets a EU labour market being absolutely
imperceptible (Zimmermann 2009).
Language barriers are the foremost hindrance to labour mobility in the EU, since
language barriers are perceived as difficult to overcome (Bonin et al.,2008:81) and they are seen
as the prime barrier to EU labour mobility (Fertig and Schmidt 2002:Table7). Language barriers
astronomically increase migration costs, hence hampering intra-European mobility (European
Foundation for the Improvement of Living and Working Conditions 2006). Legal and
administrative barriers to intra-EU mobility are very low, an illustration being the important
mobility across regions sharing a common language such as Netherlands-Flanders, Germany-
Austria, France-Wallonia, Ireland-UK, etc
Four percent of EU citizens have lived outside their native MS in another MS (European
Foundation for the Improvement of Living and Working Conditions 2006) whereas 32% of US
citizens live in a State different from the one in which they were born (US Census Bureau 2000).
These 4% have to be compared with the proportion of EU citizens who ever lived in a country
outside the EU: 3%. Therefore, the EU political and economic integration (and geographic
proximity) only counts for 1% of enhanced mobility. Indubitably, the removal of the legal and
administrative barriers to intra-EU mobility does not count for much since this rate is almost
equal to the mobility with non-EU countries where legal and administrative barriers are
prominent. This confirms what Srivastava and Green (1986:624) state when stating "cultural
similarity appears to have a more pronounced effect on relative trade flows than does shared membership in an
economic union". Moreover, these 3% have to be compared to the 18% rate of migration across
regions within a MS, despite the progresses of the EU law on free movement of workers on
equal treatment. Thence, a constant impediment shared by both non-EU countries and other
MSs seemingly hinders cross-border mobility but not intra-national mobility. Naturally, language
barriers are the distinguishable factor explaining both high intra-national mobility and low cross-
border mobility, independently of the country of destination, be it inside or outside the EU.
b. Languages in the Workplace
Individuals make language-specific investments for expected returns deriving from
language skills. With respect to mobility, to become proficient in a foreign language naturally
opens up the relevant labour market related to that language. Because learning costs are assumed
to be similar, regardless of the language learned, individuals seek accessibility to the most
sizeable national labour markets possible, conducing to focus language-acquisition on the
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'democratic deficit'. Practical obstacles occlude the emergence of a pan-EU democratic society.
As regards these practical obstacles, EU multilingualism is comprehensibly of major importance
in the obstruction of the rise of a supranational democracy.
Language is tied into political life because it naturally constitutes its medium(Longman 2007:89;
Karisson 1999). The democratic deficit is caused by an absence of European ffentlichkeit
(public sphere, Habermas 1989; 1990; 1992a; 1992b; 1992c), which posits a community of
communication" embedded with a common language (Risse 2003; Kielmansegg 1996). Wright
(2000) argues that democracy is inextricably bound with language, and one wonders how it can be managed
without a community of communication.
Democracy presupposes participation assuming interpersonal communication, which
implies exchanges of information postulating a common mediuma common language being at
the cornerstone of this socio-political chain. The society may well be multilingual; political
debates can only be unilingual.
The tie of language is perhaps the strongest and most durable that can unite mankind(Tocqueville
1961:23). With 66% of the EU citizens being monolingual (Karisson 1999), the absence of a
common language impedes the emergence of "postnational" Europeans (Habermas 2001).
Linguistic diversity clearly prevents the rise of a European 'nation' (Braga and Monti 1982). The
origin of this impediment is a demos deficit (Kraus 2008:21), and the impossibility of multilingual
campaigning in order to avoid the "multilingual election problem"(Pool 1992). There is what we call a
'receptive democratic deficit' EU leaders cannot receive messages from EU citizens, and an
'explicative democratic deficit'EU leaders cannot explain their policies to EU citizens without
either incurring prohibitive monetary and delay costs if discourses are translated into all official
languages, or contribute to the linguistic imperialismwhen EU leaders use English as a lingua franca
(Phillipson,1992) thereby contributing to a language disenfranchisement of at least 45% of EU
citizens (Ginsburg and Weber,2005;Ginsburg et al.,2006;Fidrmuc et al.,2007). Dismissals of EU
texts because of the lacking of a EU political arena incur two costs.
First, delay costs are incurred: the EU integration is postponed, whereas the economic
and political integration is supposedly welfare beneficial. Second, transaction costs are increased
since the rejections of texts lead to renegotiations costs for ersatz of the defeated Treaties.
The EU is more than a convivial order, but is neither a (linguistic) community order, nor
(yet) a social order (Van Dun 2004). The Babelian EU is a multilingual political order within
which political debates by the population are impractical. The notable void(De Swaan,2004) of
dialogue/democracy/debate as the reason for the rejection of EU texts was evident in the
European Constitution referenda when the Plan-D: Democracy, Dialogue and Debate40, costing 9
40COM(2005) 494 The Commissions Contribution to the Period of Reflection : Plan-D for
Democracy, Dialogue and Debate, 13.10.2005; COM(2008) 158/4 Debate Europe Building onExperience of Plan D for Democracy, Dialogue and Debate, 12.03.2008.
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If a cooperative game is played amongst MSs by reference to their EU linguistic rights, there is
no coordination game. A coordination game applied to the EU language policy would mean that
MSs choose a common standardfor our purpose a common language in order to maximize
MSs' payoffs. Integral inter-communications with 23 official languages require coordination
involving one common language.
I. From Coase Theorem to Linguistic Coase Theorem
Coordination cannot take place since linguistic rights are granted to MSs without a
possible bargain between them. Linguistic rights are governed unanimously according to Article
290 of the EC Treaty. A consensus over EU language policy has to be reached. A question
about why we need a Linguistic Coase Theorem?
We necessitate a Linguistic Coase Theorem inasmuch as Article 290 of the EC Treaty
requires unanimity in order to change the EU language law. The current law must be reformed
since it is economically inefficient and linguistically damaging. In order to have unanimity, all
MSs have to be better off following the agreement, without any MS being worse off. Hence,
Pareto-optimality is required. The Coase Theoremand the Political Coase Theoremleads to
optimality. Therefore, in order to exchange the EU law of languages for an optimal one, we need
to apply the Coase Theorem to languages. Consequently, the Linguistic Coase Theorem is not
only justified on economic grounds, but is also required from a legal viewpoint. We shall now
review the precedents of the Linguistic Coase Theorem, that is the Coase Theorem and the
Political Coase Theorem.
a. Overview of the Coase Theorem
The seminal article of Ronald Coase (1960) revolutionized the way we consider
externalities. The Coase Theorem has been summarized in a clear and simple way as:
"When transaction costs are zero, an efficient use of resources results from private bargaining,
regardless of the legal assignment of property rights"48.
In the absence of transaction costs, actors involved in an externality will bargain over
their rights, and will attain an efficient allocation of resources, independently of their initial
entitlement of rights. As a consequence, bargaining has to be lubricated through the reduction of
transaction costs. Therefore, the normativity of the Coase Theorem is:
48Restatement made by Cooter and Ulen (2007).
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mastered in 500 hours and English in 1,500 hours57. Wells affirms that "opposition to Esperanto is
often more emotional than rational"(Wells 2003; Piron 1994b).Esperanto does not create any
externality since it is the national or official language of no country in the world. Esperanto is
fitted to be the language of supranational democracy (Archibugi 2005) and concretizes the notion
of"linguistic democracy"especially for the EU (Fettes and Bolduc 1998:101-129). Esperanto would
be stable because the rise and fall of national powers will have no effect on Esperanto.
In conclusion, Esperanto appears to have the characteristics of optimality should MSs
engage in Coasian bargaining. Although Esperanto manifestly reveals its optimality, this outcome
seems very improbable, especially when one reviews the current relevant literature.
d. Literature Concerning The Choice of a EU Lingua Franca
The academic debate presented here is stagnant, principally owing to the neglect of the
reciprocal nature of the problem.
Abram de Swaan promotes the adoption of English as the EU lingua francabecause it is
already the "supercentral language"in the "galaxy of languages"(De Swaan 1993b:220). Yet, De Swaan
acknowledges that the hierarchization of languages is "contested", and that "language groups are
struggling to defend or impose their idiom as the central medium, or to prevent another language from achieving a
57Even with this highly prudent assumption, the efficiency of Esperanto is great enough not to create a
lock-in effect with English and to overcome the switching costs, something proven with a simple
calculus. If we optimistically assume that half of the EU citizens speak 'very good' English (250
millions EU citizens), then it costs: 250 millions x 1,500 h = 375 billions of hours of teaching for the
entire EU citizenry to speak a 'very good' English. The cost of Esperanto is: 500 millions x 500 h = 250billions of hours. It costs 1.5 times (375/250=1.5) more to have half of the EU citizens speaking 'very
good' English than for every EU citizens to become fluent in Esperanto.
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Europe. Esperanto cannot become the EU lingua franca, not only because the current EU law on
languages states that the languages of the EU can only be chosen from among the languages of
the MSs (Regulation 1/58), but also and above all because the UK would not accept to abandon
its free-ride. The scenario 'all-Esperanto' without accompanying measures is unrealistic given the
current situation.
e. The Reciprocal Nature of The Lingua Franca Problem
We have reviewed the current literature related to the choice of a EU lingua franca, and
we have seen that it is at a dead-end. Either the efficient solution ('all-Esperanto') seems
unrealistic because of the lack of coordination and consensus, or the more probable solution
('all-English') incapable of implementation on account of the "linguistic tax".
We argue that none of these propositions are realistic, and are flawed because they
ignore the reciprocal nature of the problem. Either the linguistic hegemony of English requires a
"linguistic tax" on every English-speaking country in the world (Van Parijs 2000; 2002; 2004a;
2004b), or this linguistic hegemony justifies the adoption of Esperanto as the EU lingua francain
order to cease the free-riding of the English-speaking countries (Grin; 2005). In both cases, UK
is condemned as the 'generator' of a 'linguistic harm' whilst Continental Europe becomes the
'victim'. This is in line with the Pigouvian tradition, involving a one-sided causality view of
externalities.
The true nature of the problem is not to say that the UK generates the externality and
thus begging the question "how should we restrain [the UK]?" (Coase1960). To avoid Continental
Europe being 'linguistically harmed' would inflict a harm to the UK; to allow the UK to free-ride
would inflict harm on Continental Europe.
In Coasian language, the fundamental question to ask is: should Continental Europe ("the
surrounding woods"in Coase's example) be entitled to be free from 'linguistic harm' ("the sparks"), or
should the UK be entitled to impose English ("to run additional train")?
The reciprocal nature of the present problem flows from a (double) scarcity. Indeed, there is a
scarcity of space hence the proximity of UK and Continental Europe makes the 'linguistic
pollution' possibleand there is a scarcity of knowledgehence the need for one, and only one,
lingua franca.
Had Latin continued to be the European lingua franca, English could not have become
the de facto EU lingua franca. Due to the disappearance of Latin, and due to the lack of
coordination concerning the choice of a new European lingua franca, Continental Europe created
the circumstances favourable for the rise of English as the de facto EU lingua franca. Pigouvian
reasoning of causality concerning the determination of a 'generator' and a 'victim' of the damage
is therefore proven to be flawedthereby rejecting the conspiracy theories re English (Phillipson
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