The Parmalat Problem.

When Enron launched an era of scandal in 2002, Old Europe had a good sneer about the ugly excesses of American capitalism. Now Europe has a scandal as large as any uncovered in the United States. Between 8 billion and 14 billion euro have gone missing at Parmalat, a global dairy conglomerate based in the northern Italian city of Parma. CEO Calisto Tanzi is now in a Milan jail along with a dozen other executives.

What Italian newspapers are calling "Enron a la Parmigiana" has shocked the markets. The Milan stock market is down 3 percent since the scandal broke Dec. 19, compared with a 1 percent rise in the Europewide Eurostoxx index. Italian banks, owed at least 1 billion euro by Parmalat, were hit especially hard. And just as Enron proved to be the tip of the polluted iceberg, analysts last week began asking whether Parmalat might be a leading indicator of rot at other big, family-run corporations throughout Italy, or even throughout Europe.

The yogurt first hit the fan when a Parmalat document claiming to hold 4.6 billion euro in cash in a Bank of America account on the Cayman Islands was exposed by the bank as a crude forgery. Italian investigators say executives used scissors, glue and a fax machine to create the phony assets. The company also allegedly lied about billions in outstanding debts, hiding them in some 250 different subsidiaries and shell companies with names such as Buconero, Italian for "black hole." Shortly before the scandal erupted, authorities say, management ordered documents shredded and computers smashed. The U.S. Securities and Exchange Commission, which last week filed its own suit against Parmalat in New York, calls the case "one of the largest and most brazen corporate frauds in history."

For now, indications are that the Parmalat saga is as quintessentially Italian as a Camorra tale. Tanzi's dairy giant was one of the classic family-run companies that dominate the Italian economy, like the Agnellis' Fiat, the Berlusconis' Mediaset and the Benettons' clothing empire. Uniquely immune to public scrutiny, these firms benefit from the same laws designed to protect small businesses, exempting them from the strict rules on debt and reporting that govern public corporations. One such exemption, say analysts, was key in enabling Parmalat to spread its huge debts over the 250 subsidiaries without detection.

Though a ...