IT is a European curiosity. One of only two doubly-landlocked nation states, anywhere on planet earth. Home to just 34,000 people. An Alpine principality whose constitutional independence stretches back over 200 years.

German-speaking Liechtenstein, wedged between Switzerland and Austria, is suddenly making headlines for all the wrong reasons. Long suspected of offering a safe haven for tax evasion and money laundering, this sliver of a country faces the wrath of Angela Merkel's government over Germany's biggest-ever purge on alleged tax fraud.

The story broke on St Valentine's Day when the boss of logistics multinational Deutsche Post, Klaus Zumwinkel, was arrested at his Cologne villa. He was taken away, in the full glare of television cameras, to face questioning about illegally stashing away around a million euros of his own money in a secretive Liechtenstein bank.

Next day he stepped down from his Deutsche Post role and from his chairmanship of Deutsche Telekom. Up to 750 other wealthy Germans, including other leading business figures, could be about to experience the Zumwinkel treatment. They all had financial assets hidden away in the LGT Treuhand bank in Liechtenstein's capital, Vaduz, beyond the reach of the German tax authorities. LGT is owned by the principality's billionaire ruling family.

We know this because the information on which the Berlin authorities acted was purchased from a disgruntled former LGT employee, Heinrich Kieber, by Germany's secret service, the BND. The price for the four computer discs containing the names of up to 1400 foreign clients of LGT was around £3.2m.

Some 100 of them are said to have been wealthy British citizens. And now HM Revenue & Customs has confirmed it too has paid for access to the information. That secondary payment is said to have been around £100,000.

But it could, according to reports in the past couple of days, recoup evaded taxes here totalling some £100m. Offenders could also face fines of as much again and, in some instances, prison sentences.

The Dutch are already urging any of their citizens who put money into LGT to turn themselves in or face hefty fines. Other European countries like Norway, Sweden and Finland, and the American and Canadian tax authorities and others are also keen to see if any of their citizens are on the list.

Both the bank and Liechtenstein's ruling family have voiced their indignation that stolen information has been hawked around other European capitals in this way. Acting ruler Crown Prince Alois has accused the German authorities of effectively spying on their own citizens.

The head of the Swiss Bankers' Association went further and accused Germany of adopting Gestapo methods. He later apologised. But his remarks betray a fear that Germany's standoff with Liechtenstein could spread to other European tax jurisdictions, where giving foreign tax authorities access to who holds accounts there does not feature on the list of services offered.

The tiny principality currently sits with Andorra and Monaco on the OECD's tax-haven black-list. But when it comes to shielding foreigners' wealth from tax authorities, there are still much bigger fish to fry, notably Switzerland, Luxembourg and Austria.

The Swiss do now provide information in criminal investigations and expect their banks to report signs of money laundering. They are not, however, required to provide client information to domestic or foreign tax authorities. But neighbouring countries, like Germany, are feeling the tax pinch and seem minded to do whatever it takes to reduce tax evasion.

Globalisation is forcing governments in many mature western economies to slash corporate tax rates. And the recent rows over capital gains tax reform and the tax treatment of "non-doms" here in Britain have shown how difficult it is for exchequers to squeeze more tax out of wealthy individuals.

So it comes as no surprise that these same governments are looking ever more closely at how effectively they collect the tax revenues that are already due to them. Hence Germany's focus on shadowy foundations set up in a discreet Liechtenstein bank or other modern methods of tax evasion. This is turning into a seriously hard-ball game, as the Liechtensteiners are now finding out.

The Merkel government is betting that millions of its citizens will not take kindly to the revelation that "a not inconsiderable section of the economic elite" - as interior minister Wolfgang Schauble has described them - think they should not pay their share of the national tax bill.

The tax-paying masses may even feel paying a thief for the evidence can be justified, if those who try to evade their tax obligations are brought to justice as a result.

There is talk of trade barriers or other reprisal measures if the tax havens do not clean up their acts. As Merkel herself put it: This isn't just about tax reform, it's about "the responsibility certain groups have in maintaining the coherence of this society".