VALLETTA — The EU’s smallest country could become its biggest problem.

Prime Minister Joseph Muscat has promised to step down in the new year after the investigation into the murder of journalist Daphne Caruana Galizia revealed close connections between suspects in the case and his top team. That's nowhere near enough, according to a group of MEPs who visited the island this week, and it could be a major headache for the new European Commission.

On Tuesday, the group of six EU lawmakers from the justice and home affairs committee left the prime minister's official residence, the Auberge de Castille, in the Maltese capital after talks with Muscat, a former MEP who has been prime minister since 2013, saying they had serious concerns about the rule of law.

“It is difficult to see how the credibility of [Muscat's] office can be upheld," Dutch liberal Sophie in 't Veld told reporters as she left the PM's office along with the other MEPs, including German Green Sven Giegold and Malta's Roberta Metsola, from the conservative European People's Party. "This is not just between the prime minister and the Maltese people, this is also between Malta and the European Union."

"Cooperation within the European Union is based on trust and I think it is very evident to everybody that that trust has been very seriously damaged," in 't Veld added.

The crisis has not only destabilized the island, it has also raised concerns about the impact it could have on the European Union, which has been under pressure over its handling of rule of law concerns in Hungary and Poland.

At the weekend, Muscat said in a statement that he will resign as head of the Labour Party on January 12 so the party can choose a new leader and prime minister, which will take about a month. In the meantime, Muscat said he would continue to serve as prime minister to ensure stability. The move came after his chief of staff, Keith Schembri, and a government minister stepped down after being linked to a prominent local businessman who has been charged with complicity in the murder.

The crisis has not only destabilized the island, it has also raised concerns about the impact it could have on the European Union, which has been under pressure over its handling of rule of law concerns in Hungary and Poland. A new Commission, led by Ursula von der Leyen, provides a chance for a new approach to the bloc's more difficult members, and Malta could be its first test.

"This is a test case for Ursula von der Leyen," Giegold told POLITICO. "Will she improve the rule of law? Will she use all the tools she has and not keep silent when it comes to rule of law?" he asked, adding that former Commission President Jean-Claude Juncker and First Vice-President Frans Timmermans had "blocked progress on Malta."

Giegold was speaking on day one of a two-day fact-finding mission, which also included meetings with Maltese President George Vella and members of Caruana Galizia’s family. The Maltese government issued a statement that merely acknowledged the meeting had taken place.

Complex case

Caruana Galizia, a controversial journalist and blogger, was killed by a car bomb in October 2017. The investigation took an unexpected turn late last month when Muscat offered to pardon a man who claimed to know the mastermind behind the murder. That same week, businessman Yorgen Fenech was detained on board his luxury yacht. Fenech was later charged with participating in a criminal organization, complicity in causing an explosion, and complicity in the murder.

Schembri, Muscat's chief of staff, and Cabinet minister Konrad Mizzi have since resigned in connection with the case.

Despite mass demonstrations calling on him to resign, Muscat said in a TV address that while he felt “deepest regret” that Caruana Galizia was murdered, “this case cannot define everything that our country is and what we have accomplished together."

But it has caused deep embarrassment in Brussels, where Muscat is a fixture at European summits. Earlier this year, he was said to have shown interest in replacing Donald Tusk as European Council president and sought to form an alliance with French President Emmanuel Macron.

Metsola, a member of the opposition Nationalist Party, told POLITICO Muscat had acted "in a very arrogant way" during Tuesday's meeting. Asked how he would cope with a summit of EU leaders on December 12-13, Metsola said Muscat's answer "was ‘you deal with your peers, I deal with mine.'"

The situation in Malta, she added, "could be very damaging for the EU."

Though two European Parliament resolutions were drafted on Malta's rule of law problems after Caruana Galizia's death, the European Commission has taken a cautious line and has not triggered the formal mechanism for tackling such issues, known as Article 7. Poland and Hungary are subject to Article 7 proceedings but these have stalled.

Commission spokespeople have said repeatedly in recent days that they are “following developments in Malta very closely” and Vera Jourová, the new commissioner for values and transparency, told an event on Monday that the grounds for triggering the Article 7 procedure were "always caused by systemic deficiency in the system."

While Metsola and others have been vocal in their criticism, Muscat's political family, the Socialists and Democrats group, has shied away from condemning the Maltese PM.

Many MEPs hope that von der Leyen, who has put the rule of law issue high on her agenda, will push for a new mechanism that has "an EU-wide scope" and "objective annual reporting by the Commission," as she mentioned in her guidelines for taking office.

“Von der Leyen already spoke about the rule of law and we are expecting her to take that action with the rule of law mechanism that we’ve been asking for," Metsola said.

While Metsola and others have been vocal in their criticism, Muscat's political family, the Socialists and Democrats group, has shied away from condemning the Maltese PM.

"Of course for the socialists, it is the most difficult situation," said German S&D MEP Birgit Sippel. "But we have to deal with it, we do need transparency and we do need to find the answers and the truth. There is no other way out."