In the marinas of Malta there is much talk of gleaming new yachts snapped up by buyers with wads of cash and little interest in sailing, The Economist reported in its last issue.

The Maltese lira will disappear in January, when Malta joins the euro area. Many Maltese have savings stashed under mattresses and are scared of attracting the taxman’s attention if they go to the bank to convert them to euros. Several tax amnesties have yielded little in the way of deposits. Instead, Maltese seem to be rushing to spend their hidden liri on big-ticket items while they still can.

The government is hoping the euro will transport Malta’s economy to a bright future based on services.

The dwindling of Britain’s military presence over the 1970s withered the islands’ old fortress economy. With great effort, the authorities lured some manufacturing, including textile factories, microchip plants, and presses that print banknotes.

But textiles are drifting off to China and other parts of Asia, and chip foundries might follow, forcing Malta’s manufacturers to move upmarket. Increasingly Maltese firms, such as makers of high-quality wooden furniture, are finding that their products are competitive around Europe. Bordeaux’s newest posh hotel has doors made in Malta.

Malta is also discovering that in an increasingly virtual world, being an island is no longer an obstacle to providing services, especially in finance and computing, The Economist said.

In the late 1980s the government tried building a typical offshore financial-centre, complete with tax sheltering and secrecy. But that got in the way of another Maltese aim – to join the European Union. So the country changed tack and aimed for integration into Europe, with a financial sector that passed all European tests for onshore probity.

One big effect of joining the EU was a surge in inward investment. Last year the flow was around Lm550m ($188m), more than 25 times the level 10 years ago, according to Lawrence Gonzi, the Prime Minister.

Foreigners are attracted chiefly by Malta’s tax system, which allows income tax on dividends to be offset against corporate tax, reducing the effective tax rate on dividends from 35 per cent to five per cent. It also helps that accommodation and labour costs are between one-half and one-third those of rival hubs, such as Dublin and Luxembourg.

Most of the investment is going into financial services, and one niche in particular: the in-house or “captive” insurance operations of big car manufacturers. BMW has moved its captive insurance unit from Dublin; Renault, PSA Peugeot Citroën, Volkswagen, Vodafone and RWE have also set up shop in Valletta.

These units, which are run by insurance-management firms such as Marsh & McLellan, are allowed to sell a range of other insurance products around the EU. There are also some 250 hedge funds based in Malta. The value of assets under their management has grown sevenfold to EUR7.5 billion ($10.6 billion) in the three years since EU accession.

Other industries are beginning to follow. Lufthansa, which already services its smaller planes at Malta’s airport, plans to tend to its widebody fleet there as well. The Maltese have created a special course for aircraft technicians at a local college to ensure a steady supply of qualified workers.

About 20 pharmaceutical firms making generic drugs have also joined the herd of businesses streaming to Valletta, because a wrinkle in Maltese law allows them to do development work on copycat versions of patented drugs and so be ready to market them in the EU when the patent expires.

But the most spectacular recent arrivals are investors from the United Arab Emirates seeking a European bridgehead. Dubai Holding, an investment firm that has attracted technology giants such as Microsoft, Hewlett-Packard, Cisco and Oracle to a development called Internet City on the outskirts of Dubai, is spending more than $300m to set up a similar facility in Malta.

“They wanted a one-stop shop for Europe,” says Dr Gonzi, “and they have undertaken to create 3,500 proper IT jobs.” He is hoping this will attract other big names to Malta. Again, the local vocational college has promised to churn out suitably qualified workers.

If only the bigger economies in Europe could move so nimbly in the face of globalisation, The Economist concluded.