On a Saturday evening in January, an estimated 110,000 people – more than a quarter of Malta’s population – funnelled into Valletta, its tiny gem of a capital, to celebrate the city’s inauguration as Europe’s Capital of Culture 2018. “National pride has reached historic levels,” proclaimed the prime minister, Joseph Muscat.

No matter that the award is a joint one, which Valletta is sharing with Leeuwarden, the 25th largest city in the Netherlands. No matter that it goes to countries on a rota, not as an honour. No matter that much of the artistic material on the night was recycled. No matter that the pride evaporated when people had to wait up to three hours to get on a bus home. And no matter that the occasion came barely three months after Malta’s greatest-ever reputational disaster: the spectacular murder, by car bomb, of the country’s most prominent journalist, Daphne Caruana Galizia.

That was not part of Muscat’s narrative. Malta is going through extraordinary times. It is the smallest country in the EU by both population and area (smaller than Rutland). It is also the most densely populated (by far) and becoming more so. It must also be the fastest-changing.

When I was a teenager, my family spent all our holidays in Malta. I was very fond of it, had good friends there, grew interested in the history. I even wrote a university dissertation on Maltese politics, under the tutelage of a Malta-loving professor, Dennis Austin. Somehow, I never went back for more than 40 years, until now. There is nowhere more foreign than a place one used to know.

In 1967, Austin wrote a letter to the Times pleading for Malta. The vital British naval presence was being run down: 13 per cent unemployment beckoned; something had to be done. Malta then was a pious, poor, put-upon place. But it had sustained its language and traditions, and had famously withstood German wartime bombing – and near-starvation – thus being awarded a collective George Cross; it was polite to use Malta GC as the address.

In 1964 it became independent from Britain, something by no means preordained. In the Fifties Dom Mintoff, the forceful but erratic leader of Malta’s Labour Party, had demanded full integration into the UK, turning it into a real Rutland. That notion faded. And Britain’s subsequent economic crises actually turned out to be more opportunity than threat. One of Harold Wilson’s panic measures was a £50 limit on foreign exchange for travellers, rendering all but cheap package holidays almost untenable. But Malta was still part of the sterling area and thus exempt.

The charms of Rutland-in-the-Med were, um, rugged: the hotels were eccentric; the beaches filthy; the Catholic church’s strictures pervasive; the cuisine influenced by the Royal Navy and the NAAFI. But the climate was trustworthy; the people engaging, resourceful and resilient, as they had proved in the war. And, as a local saying goes: il-maltin jafu idawru lira – the Maltese know how to make money. We were not the only British family to find it beguiling.

Maltese politics were also fascinating: always raucous, occasionally violent. Labour and the Christian Democrat-style Nationalists were invariably closely matched with entrenched tribal support: more like United vs City than left vs right. And small-country back-scratching was part of the fun, especially because so many jobs were government ones. This was intensified by the single transferable vote system, more or less as in Ireland, which encourages competition between candidates of the same party. You get elected by knowing everyone, and doing Tammany Hall-style favours. “There’s always been clientelism. Poor people trying to pressure politicians to get them a job or promotion,” explains Henry Frendo, professor of modern history at the University of Malta.

“It’s an unfortunate system for us,” says Arnold Cassola, founder of Malta’s Green Party, which has not so much been squeezed as throttled. “And for the country, I’d say. Politicians can offer jobs. They can sponsor the football team, donate a clarinet to the local band or something for the village feast.”

However, after an election it is winner-takes-all. The prime minister chooses everyone from the chief justice and the police commissioner to the chairman of the theatre. Loyalty essential; competence optional. “The only thing different from the Middle Ages is that we don’t rape the other side’s women,” says Cassola. Mintoff, back in power in the 1970s and 1980s, led Malta away from Britain towards Gaddafi’s Libya, to the horror of traditionalists. Then came payback time, and the right fully exploited the spoils of victory when they were in power for 24 years out of 26 prior to 2013.

***

Meanwhile, the young Joseph Muscat was working his way through the Labour Party apparat. He became party leader, aged 34, in 2008. “He was very modern, very capable, very charismatic,” according to Christian Peregin, editor of the website Lovin Malta. He embraced divorce, gay rights, a loosening of censorship, areas where papal views had long held sway. Eventually, Muscat also embraced the EU, which Malta had joined in 2004 despite grumpy objections from Labour, then in opposition. The country benefited, but the Nationalists did not: in 2013 Muscat won big. “The old government was very tired and seen as corrupt,” said Peregin. “Muscat had energy. And he took that energy into government.”

Like his British equivalent, Tony Blair, Muscat had to finesse the fear that Labour would scare off capital. Unlike Blair, he promptly made a businessman his chief of staff: Keith Schembri. “That’s one reason the government is performing,” says Victor Vella, editor of the trade union-owned newspaper It-Torca, “It’s got people who can do things.” That does not explain why Schembri, a reputed multi-millionaire, would want the job. “The government is not pro-business,” the scholar-priest Father Joe Borg tells me. “It is a business.”

The good times rolled ever faster. Tourism grew, as Malta gained from North Africa’s perceived dangers. Online gambling companies kept coming, dozens of them. And that catch-all term “financial services”. In the flag-of-convenience business – in which regulations are dodged by firms registering their merchant ships abroad – Malta is number six, with nearly 90 million tonnes of shipping, chasing such paragon nations as Panama and Liberia. It is not offshore in a metaphorical sense. It’s EU, so everything, including the low corporate tax rate, is transparent and legal. Apparently.

The boom is not just good for business. “My pension has gone up,” says one man I meet in a bar. “We have free education. We have free health. If they cannot do your operation in two months, they send you to a private hospital, free. Pensioners now get cheap electricity. What more could you want?” In particular, homeowners benefited as property prices surged. And that meant most people. “Invest in stone,” is another Maltese saying. Or these days, in concrete. The traditional Maltese house is made of lovely, soft limestone with louvred shutters to catch midsummer breezes, with a shady garden and a well. Pole position was on Sliema beachfront, just across the harbour from Valletta. The pressure to cash in so these properties could turn into five-, ten-, 20-, even 40-storey blocks of flats, became irresistible. Local joke: “What’s Malta’s national bird?” “The crane.”

Sliema and the sprawling suburbs now represent the reality of Malta, not the well-preserved but demographically dead Valletta. But it is a complex reality. Beneath the new apartments are top-end estate agencies (a €5.8m penthouse anyone?), branded stores and services aimed at the oligarchs who are seeking bolt-holes and footholds on the EU’s southern edge: a sunny place for shady people. Across the road, though, a Victorian fort-turned-pub serves full Englishes for €4.95 and €7 pitchers of Carlsberg. The two million tourists that arrive annually are overwhelmingly Ryanair-ish. It makes for a strange mix of Monaco and Morecambe. And in winter – which is like an English April – hotels are also full of amiable Saga types who can stay at off-season rates paid for by the savings on home heating.

The unemployment that so alarmed Professor Austin has receded to vanishing point. Maltese no longer do the dirtiest work: there are Africans, Romanians, Syrians, whoever. Accountants and techies are in huge demand. What more could anyone want? For me, I suppose, I want some trace of the innocent island I remember. Because every day the lively bilingual local papers splash stories about corruption that don’t concern football kits or clarinets. Whatever the revelation, the Maltese just seem to shrug. Except that Malta’s most persistent journalist has been murdered.

The foreign press canonised Daphne Caruana Galizia at once, which was understandable. In Malta, even her supporters are more nuanced. Latterly, Daphne (always just Daphne) wrote her own unmissable blog, Running Commentary. This was unfortunate because she would have benefited enormously from a firm editor. Her final post still leads the homepage. It ends with chilling perceptiveness: “There are crooks everywhere you look now. The situation is desperate.” But the headline reads: “That crook Schembri was in court today, pleading that he is not a crook.” Which gives a flavour of her intemperance. She was also often cruel, crass, vindictive and – until the election of the current Nationalist opposition leader, Adrian Delia, whom she hated – party-partisan.

Three men have been arrested for her murder, on compelling evidence. But everyone knows they were just hitmen. Their paymasters are unknown, partly because it could have been almost anyone. They could have been connected with dodgy bankers, the Azerbaijanis, oil racketeers, drug dealers, the American university project (a Jordanian construction group was given a lump of prime coastland and attracted just 15 students), the opaque PFI-style hospital deal, or indeed the government. Or just pissed-off neighbours. The most plausible explanation I heard suggested the Sicilian mafia, Sicily being 60 miles away and car bombs their trademark. It could have been all of them, as on the Orient Express. But, says Christian Peregin: “I will never accept that she was killed because of bad journalism. She was killed because of her best journalism. She was killed because she was getting very close to something important.”

What we do know is that both Schembri and Konrad Mizzi, Muscat’s most influential minister, set up Panamanian companies within days of Labour’s election win in 2013. A third account was alleged, by Daphne, to be linked to Muscat’s wife. Last summer a furious Muscat decided to let the people decide on his probity and called a snap election: he won, his majority almost unchanged. He would win again tomorrow: Daphne was not alone in thinking the new opposition leader useless – and he still owes the state thousands in back-taxes.

There are clearly risks in probing too deep into modern Malta: insanity, I’d say, as well as death. Lies are routine currency. The bus company recently announced that its punctuality rate had reached 94 per cent: I think there may be a decimal point missing. Whatever comes after boom, it is unlikely to be bus. There are almost as many cars as people, and jams are normal. The beaches are much cleaner than of old but nothing else is. The urban air is foul with exhaust fumes and the detritus of the construction sites – worse when the wind turns southerly and imports tonnes of Saharan dust. Cranes aside, I can’t remember hearing any songbirds. But then one lingering Maltese tradition is the habit of shooting them.

Police incompetence, or worse, is clearly rife. And planning rules are farcical. God is not the force of old either. The Maltese church escaped lightly from sexual abuse scandals but, in a less homogeneous society, attendance at mass has declined from near-unanimity to 50 per cent or less. Joe Borg accepts that the legalisation of divorce was inevitable and justifiable. But he fears for the other principles that governed Malta: “I think we will have surrogacy within three years, euthanasia within five and abortion within ten.”

***

In early 2017, as Muscat headed towards his re-coronation, he was also preening himself as Malta, on a similar rota to that for the Capital of Culture, held the EU presidency. From this platform, he was notably harsh towards the UK. Two thoughts occur. One was that he had no choice: an ex-British colony could hardly be seen as soft on Brexit. The other was that he had reason to be cross. Malta’s success is built on its use of differential tax to attract business. It could be crushed by the long-held Franco-German dream of tax harmonisation. Who was the greatest obstacle to this idea? Britain, who will no longer be around to raise objections.

There are other threats. A European Parliament delegation was shocked by Malta’s handling of Daphne’s murder. The aggressive sale of Schengen zone passports to dubious incomers is also causing disquiet in Brussels and Strasbourg. And there is a growing sense that Malta is, well, taking the piss. In the UK, we only know of one article in the Lisbon Treaty: 50. Elsewhere there is growing awareness of another provision, Article 7, the EU naughty step, which can suspend rights of membership. Poland and Hungary are the obvious targets. But Malta is nervous, too. It should be. Taking the ferry across the harbour from Sliema to Valletta, you see the domed basilica peering above the ramparts, one of the great sights of Europe. Coming back, you see the new Sliema: a cheapjack Dubai or Singapore being built on shaky foundations. Muscat’s pride might come before a heavy fall.

For the next article in our “Lost Continent” series, Matthew Engel will visit Hungary.