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.
It is definitely not clear, but there are several hints arguing that it's set in Denmark:
1. The Author (H C Andersen) is from Denmark
2. In the movie Ariel sits in the same position and on a similar stone as the statue 'The Little Mermaid' in Denmark.
4. Disney named the fish 'flounder' (a fish to be found in Denmark) even though he is obviously a more exotic fish.
3. Denmark have had several kings/princes through history named Eric.
4. Despise Andersen describing the beach the little mermaid wakes up on, as an exotic beach with palms and lemon trees, Disney portrays it as a typical scandinavian beach with only sand, grass and hills.
I think the story takes place somewhere on a European cost of the Mediterranean Sea (perhaps Greece). I based this off of several hints from the original story and the movie. For example:
- The prince is described as having coal black eyes and raven hair (this obviously doesn’t settle anything, but a Mediterranean/ Arabic prince is much more likely to be so dark than a central or northern European one)
- The beaches are described as having fine, white sand with lofty palm trees, orange trees, and citron trees (all three of which can only easily be grown in tropical to sub-tropical climates such as in the Mediterranean)
- The rolling green hills have grape vines on them (this at least rules out Denmark- see grape- growing regions of Europe below)
- The convent is specifically described as being built of white material (immediately putting one in mind of Mediterranean architecture) and the palace of yellow stone with long flights of marble steps, gilded cupolas, pillars, and marble statues (reminiscent of Greek and Italian architecture)
- The little mermaid was given robes of silk and muslin and wore silk and gold to the wedding (perhaps doesn’t mean much but that’s two of her outfits that include silk and silk was most widely popular in the Mediterranean where it was directly imported and later manufactured)
- The prince had female slaves who wore silk and gold and danced (that doesn’t sound European at all, that’s much more likely Middle Eastern)
- The chef is French and Ariel and Eric buy baguettes in the village (French influence)
- The castle architecture (see below) looks very similar to “Mediterranean architecture homes” (see below)
- Grapes shown in the village
- Palm trees shown in the village and palace
- Onion dome shown in village (possibly Middle Eastern influence)
- Arabic-style windows shown in the village (Middle Eastern influence)
- Sebastian originally was supposed to have an English accent instead of a Jamaican one. He was changed mostly to create a more specific musical style.
In conclusion, the best place in which you can find Middle Eastern, French, Greek, and Italian influences with a tropical climate is along the European shore in the Mediterranean. Possibly Greece.