I don't think people should have to speak fluent English before coming to English speaking countries, nor should we have to speak language X of country Y fluently. They should, however, try and get the basics down pat. We have the occasional person through the doors at work that just has no idea and doesn't even care and they should be shot. Although most of them at least try to speak English and understand that it is them that is the cause of the language barrier and are therefore more understanding.
Anyway, back to the question. Yes, employers should be allowed to ensure that potential employees can speak English well enough to communicate with customers effectively.
Of course they should be able to! In business your customers are everything, if they get frustrated by your staff because you hire a heap of <insert
really racist term here>'s that are completely incapable of doing their job due to their lack of respect for the language that they need to speak to do their job, then your customers are not going to come back in a real hurry.
I had a young (aka CHEAP...) Asian girl come in yesterday actually who was very nice and well presented, but I could not understand a word that she said, she even asked me what some of the questions on her application form meant such as "Address", "D.O.B.", "Previous Employer", need I go on? I threw her application form in the bin before she even walked out the door.
Anyway, come to Australia if your English isn't great as long as you're trying, but don't expect to work here until it's pretty damn fluent. Otherwise you can just fuck off - in the nicest possible way!
But like you said Fritz, that's what an interview is for.
(edit: typo)
