A week of arrests and resignations, of drama and fury unlike anything Malta has seen in generations, might not have happened but for the keen nose of a police sniffer dog called Peter.

On Wednesday 13 November, the spaniel was screening passengers when he alerted his handlers to the smell of cash. Lots of it.

Customs reportedly found €210,000 (£178,000) in the belongings of a man preparing to board a flight to Istanbul.

The economic crimes unit were called and a day later, the incident led to the arrest of a taxi driver, Melvin Theuma.

Under questioning by police, Theuma made the sensational claim that he had acted as intermediary in the contract killing of Malta’s best-known investigative journalist, Daphne Caruana Galizia.

Now, as a consequence of Theuma’s claims, the EU’s smallest state is in the throes of its biggest political convulsion since the 1960s, when the former British colony became an independent country.

At the heart of it all is the murder of Caruana Galizia, who died two years ago when a bomb planted under the seat of her rental car was detonated near her home in the village of Bidnija.

Eight months before she died, Caruana Galizia revealed that the then energy minister, Konrad Mizzi, and the prime minister’s chief of staff, Keith Schembri, had become beneficiaries of secretive offshore companies soon after entering office.

Both denied wrongdoing – and the disclosures made her a target for criticism by supporters of Joseph Muscat’s Labour government.

Three men accused of planting the bomb are awaiting trial. But until this week, the police investigation into what happened appeared to have stalled, even though it is claimed police knew the name of a potential middleman in spring 2018.

And then Theuma was arrested – and made his claims.

When Theuma called for his lawyers, he gave two names that made it clear he was ready to talk.

He asked for Jason Azzopardi, the Caruana Galizia family lawyer, and his colleague Simon Busuttil.

Both are members of parliament for the opposition nationalist party – Busuttil was its leader until 2017. They have been at the forefront of the battle to hold Muscat’s government to account.

“The moment he was arrested he immediately informed police that he will not speak unless he has two lawyers – myself and Jason Azzopardi,” said Busuttil in an interview at his office in Valletta. “When this news got to us it was immediately evident not only who this man was, but also that because he was arrested he wanted to protect himself. Both of us obviously declined to meet him, but this is what happened.”

On Monday the attorney general accepted his testimony, and Theuma was granted a presidential pardon. From that moment, arrests and resignations followed each other at bewildering speed. Theuma claimed the man who paid €150,000 for the contract killing was Yorgen Fenech.

Fenech, a local businessman with interests in property and gambling, and a lucrative government concession to run a power station, was apprehended at sea after attempting to leave Malta on his yacht.

Under questioning, Fenech gave testimony about Schembri – the man who had run Muscat’s office since the 2013 election.

Fenech claimed Schembri was connected to the plot to murder Caruana Galizia.

After resigning from his post on Monday, Schembri was taken into custody and questioned by police until Thursday, when he was released. Schembri’s lawyers have not responded to multiple requests for comment. However, he broke his silence late on Friday, telling a Times of Malta reporter that he denied the allegations against him.

His resignation was followed by two others. Mizzi quit, and then the economy minister – another target of Caruana Galizia’s investigations – suspended himself. Both have denied any criminal wrongdoing and neither have been arrested.

News of Schembri’s release broke during a marathon six-and-a-half-hour cabinet meeting that began on Thursday evening and continued into Friday.

The unscheduled gathering was officially called to decide whether the cabinet should grant Fenech’s request for a presidential pardon – in exchange for evidence which his lawyers claimed would implicate Schembri and others. The cabinet decided against.

But journalists were briefed, as the ministerial cars began arriving, that there was another item on the agenda: the question of whether Muscat should remain as prime minister. His deputy, Chris Fearne, has been campaigning for the top job.

Fearne had broken ranks some days before, saying damage from the scandal to Malta’s reputation was “almost irreparable”.

Thanks to the drama of the last two weeks, those inside the prime minister’s office in the 18th-century sandstone palace known as the Auberge de Castille will have been only too aware that observers around the world were paying close attention to their deliberations.

What happens in Malta has come to matter to Europe, and those who see threats to the rule of law within its borders.

This point was made in a carefully timed speech on Thursday by the MEP Manfred Weber, chair of the centre-right EPP group. “The situation in Malta has consequences for the entire European project,” said Weber. “I think this parliament needs to point out now more than ever to the authorities that the assassination of a journalist with clear political links must have clear political consequences.”

By far the smallest of the EU states, Malta has a population roughly the same as that of Leeds, but its vote carries equal weight at European council meetings with those of the bloc’s major economies. It has enjoyed a financial boom, fuelled by online gambling, crypto-currency exchanges, the sale of citizenship, and a financial centre with a reputation for lax controls on money laundering and tax evasion.

The country has been used a gateway into Europe for money from Libya, Azerbaijan, Russia, even Venezuela.

In 2018, the European Central Bank revoked the licence of a bank called Pilatus, first investigated by Caruana Galizia, after its Iranian owner was arrested on sanctions-busting charges by US prosecutors.

Despite growing alarm over events in Malta, condemnation within the wider European Labour family has been mostly absent.

Muscat drew on support from, among others, Tony Blair, who sent a video message endorsing his 2017 re-election campaign. Blair and his wife, Cherie, were photographed later that year with the Muscats, in casual summer clothes, during a visit to the island.

It was a pleasure hosting Tony and Cherie Blair and sharing so many insights with them -JM pic.twitter.com/8pqulbPvA1 — Joseph Muscat (@JosephMuscat_JM) August 6, 2017

He even launched a campaign to succeed Donald Tusk as president of the EU council.

Defiant to the end, on Friday morning Muscat said he would only step down once the investigation was “complete”.

His decision was greeted with dismay, not least by Caruana Galizia’s sons, both of whom were waiting at Castille.

Across town, a nightly ritual was under way. Contractors acting on government orders were picking up flowers and candles. The makeshift memorial to Caruana Galizia, set up opposite the court house, was being quietly cleared away. A few hours later, as they do each morning, her sisters and their friends would return to replace them.