Tax evasion costs Western governments millions in lost income. It is also a crime. But tracking down offenders is costly, time-consuming and often difficult - especially when banks in statelets around the world guard in anonymous accounts vast sums from foreign clients without any questions asked. Little wonder, therefore, that the tax authorities in Britain, Germany and other industrialised economies have campaigned relentlessly against the loophole status of tax havens, or that the Organisation for Economic Co-operation and Development has named Liechtenstein, Andorra and Monaco on a blacklist of countries earning a parasitical living out of such abuse.

Stopping the outflow of taxable income is not easy. Britain already levies a fine of up to 100 per cent of the tax owed on any money put in a Liechtenstein account, while imposing a prison sentence of up to seven years. Germany has equally draconian measures. But its latest attempt to claw back lost income has caused uproar and has implications that go far beyond the federal republic. The country's secret services covertly paid more than €4 million to a former employee of a Liechtenstein bank to obtain a smuggled disk detailing its foreign account-holders, including hundreds of extremely wealthy German residents who had tried to hide their income. The German tax authorities have now started a thorough-going crackdown, provoking a crisis in relations between Berlin and the Alpine principality.

Britain has been dragged into the row after it emerged that the Inland Revenue also paid the whistle-blower £100,000 for a list of about 100 Britons allegedly evading tax. Other countries, especially in Scandinavia, are interested in the list. The affair puts one of Europe's smallest states in an unusual spotlight, reminiscent of the Peter Sellers comedy The Mouse that Roared. Yet the issues raised are far from comical. The first disturbing question is whether it is ethical to use intelligence services to spy on a friendly neighbour and to pay for information from a man who stole it from his employers. The payments seem, at the very least, distasteful. But the Liechtenstein sums are considerable: Germany estimates that about €4 billion in untaxed income were hidden.

The second issue is one of international law. Liechtenstein and other countries offering anonymous accounts do so legally, insisting that they are not responsible for how the deposits were obtained. This secrecy has been so abused by third-world dictators, drug cartels and money launderers that international pressure has forced Switzerland, by far the largest recipient of such deposits, to monitor accounts to prevent fraud and money laundering. Swiss banks already withhold interest to prevent tax evasion. They now fear that the Liechtenstein affair will increase pressure on them, and on other countries such as Luxembourg, to disclose more information or even to end all anonymous banking.

An emotional note has crept into the quarrel with Germany, partly because of crass Swiss comparisons with “Gestapo tactics” and because the Liechtenstein Royal Family own the private bank in question. The role and legitimacy of tax havens needs greater clarity. How should those countries dependent on financial services police their operations to ensure legitimacy? What is clear is that bullying Europe's smallest states is counter-productive. It would be better to persuade them that interdependence is a two-way street, and that change is the best guarantee of good relations with their larger neighbours.