I think it is a French colony in the Caribbean. Here's why:
Sebastian is Caribbean
He is supposed to be a Jamaican Red Crab
There is a hurricane
French Colony because of the cook, the baguettes, the berets etc,
Also, in WHSmith there is a disney puzzle of the earth, and Ariel and Flounder are jumping out of the Gulf of Mexico
On Yahoo I heard it was set in Croatia. That is my best guess. Sorry. I say that because I really don't know but I suggest you compare the movie with Croatia and Denmark. The scene were Eric is throwing the flute the beach looks like Denmark but the town reminds me of Croatia.