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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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