In Lilliput, the locals tied up meddlesome giants; in Liechtenstein, the burghers do not need rope to keep heavyweights in check. They have Crown Prince Alois, their acting head of state, who is not shy in taking on larger states that think they “live in an era when might makes right”.

After days of sniping from German politicians, enraged about a domestic tax-fraud scandal involving accounts in the Alpine tax haven, the 39-year-old prince on Tuesday accused Germany of running a “campaign” against little Liechtenstein.

Germans had discovered that prosecutors bought stolen bank data from a whistleblower and were targeting hundreds of residents for owning trusts in Liechtenstein, including members of the corporate elite, such as Klaus Zumwinkel, chief executive of Deutsche Post. The Germans lashed out at Liechtenstein.

Although a quiet, reflective man, the prince decided to take a rare public stand. Accused of aiding and abetting tax fraud – the banking principality does not recognise it as a criminal offence – he shot back that Germany had “trafficked in stolen goods.”

In an apparent allusion to Germany’s belligerent history last century, he added it “still” did not know how to treat friendly nations and obviously placed “fiscal interests above the rule of law”. If it were a more direct democracy with a better tax system perhaps its citizens would not cheat, he suggested.

Liechtenstein’s critics suddenly had to consider that the pocket state, wedged between the Rhine river and an Alpine precipice, might be not only of Lilliputian geopolitical clout but also Brobdingnagian media savvy. They were stunned by the attack.

“Totally out of order,” said Kurt Beck, leader of the Social Democrats, a junior partner in the German coalition government; “rogue state” muttered a senior Berlin lawmaker.

In Liechtenstein, however, Prince Alois was swept up on a wave of adulation. “It was sensational, what he said,” enthused Maria-Loreto Corbi, an assistant in a tobacconist in the pedestrian shopping area of the capital, Vaduz. “We all feel he said what needed to be said. I see much more of his father [Prince Hans-Adam II] because he buys his cigars here. But what I have seen of the prince, I’d say he was quiet and intelligent and maybe this was his way of proving to his people: I am ready to rule.”

Although governed by an elected parliament, this 160sq km country is home to the Liechtenstein dynasty, one of the oldest noble families with a lineage tracing back to the 12th century. The family watches over its 35,000 subjects from a mountainside castle in Vaduz, which it has owned since 1712.

The Liechtenstein dynasty benefits from an anachronistic confluence of legislative, judicial and eco­nomic power – the family fortune is estimated at €4bn ($6bn) to €5bn. The head of state has the power to sack a govern­ment and appoint judges while continuing with extensive business interests in property and in one of the state’s most important firms, LGT Bank. The family firm, run by Max, Prince Alois’ brother, was at the heart of the German scandal.

Prince Alois was born on June 11 1968. Apart from living in a castle, his childhood seems to have been normal. He finished at a nearby grammar school in 1987. Between May 1987 and April 1988, he received a basic officer’s training at the Royal Military Academy at Sandhurst in the UK. Serving in his platoon were men from Oman, Jamaica, Saudi Arabia and Malaysia. He left as a second lieutenant in the Coldstream Guards regiment. He enrolled at Salzburg university in 1988 and gained a masters degree in law five years later. Soon after, he married Sophie, duchess of Bavaria, and spent 1993 to 1996 working in London for Arthur Andersen, the auditing group. The first of four children was born during this period.

The young family moved to Vaduz, where Prince Alois spent the next eight years learning the family trades. He watched his father, Hans-Adam II, now 63, charm and threaten his subjects into giving him more constitutional power – and then cede it to Prince Alois in August 2004, when he made him acting head of state in preparation for his eventual succession.

“Under the old rules, the ruler couldn’t decide alone,” says Mario Frick, prime minister from 1997 to 2001 and a critic of the reform. “But Hans-Adam saw himself as a player, a superman among the puny. He wanted power. To win the referendum, he promised to install Alois.”

He continued: “The new head of state was polite, quiet, retiring, not the best speaker in the world, and also keen to avoid conflict. This was good for the governments and the people – but also for his father. Many think Alois responds to his father’s wishes a lot.”

Rather than interpreting Prince Alois’ recent tirade as a sign of maturity, some critics suggest it shows continued dependence. “This was the language of the father, and I’m sure he played a big role in deciding his son had to speak out,” said one person who knows both men.

“I was surprised the prince was so outspoken on Tuesday, because it was rather out of character. Such aggression was untypical,” he added, in contrast with his father, who is “very poli­tical and thrives on being provocative and taking on criticism”.

A number of people, who wanted to remain anonymous, conceded the prince’s combative stance had made him popular but said he would have done better to ignore his father, as they fear it will create lasting problems in foreign relations. “This will not help at all with Berlin. He will not be travelling to Germany for the next five years, because he will not be getting an invitation,” one said. That will not help as he faces pressure to loosen banking secrecy while also negotiating entry to the European Union’s Schengen area to end border controls.

Indeed, opening the Liechtenstein parliamentary session on Thursday, he no longer sounded the swashbuckling, giant-killer. His speech was uninspired and poorly delivered. Although Prince Alois has not yet caved in to German demands, making a vague pledge to provide judicial aid to states pursuing tax fraud, he pledged to end the “ping-pong” with Berlin. In doing so he seemed to recognise the wisdom of a line from the speech he gave a few days earlier: “We are a small country dependent on friendly, neighbourly relations.”

Additional reporting by Hugh Williamson in Berlin and Ralph Atkins in Frankfurt

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