Last week's report by the chief of the International Atomic Energy Agency accusing Iran of failing to disclose the full extent of its nuclear energy program was deeply troubling. IAEA Director General Mohammed El Baradei stopped short of directly accusing Iran of proceeding with a covert nuclear weapons program, but his report raises troubling questions about whether Tehran is serious about ending its suspected efforts to produce such weapons. The Agency's inspectors have found that Iran has concealed its past work on sophisticated centrifuges, hidden the development of a reactor capable of making radioactive materials that can be used to trigger nuclear weapons, and provided misleading explanations of why some of their centrifuge plants contained traces of highly enriched uranium, which is used to make nuclear bombs. Now, Iranian Defense Minister Ali Shamkhani admits that the Iranian military has been involved in the supposedly civilian nuclear efforts, and Foreign Minister Kamal Kharrazi insists that Iran will "definitely resume uranium enrichment" once its relations with the IAEA are sorted out.

This latest evidence of Iranian dissimulation and backtracking on the nuclear issue poses a great challenge to the Europeans—Britain, Germany, and France—who so proudly reached a nuclear deal with Iran last fall. In that deal, Iran agreed to account fully for its past nuclear activities, to sign an enhanced protocol on nuclear inspections, and to suspend its uranium enrichment and reprocessing activities, many of which had only recently been revealed by leaks from Iranian opposition groups. The European leaders stated that if Iran fulfilled all its pledges, and eventually ceased uranium enrichment entirely, the European Union would proceed with the long-planned trade and cooperation agreements that Iran's leaders were so desperate for, to help bail out their failing economy. The result, the Europeans believed, would prove to the Americans that the carrot of economic and diplomatic cooperation could be as effective a nonproliferation tool as the stick of military force.

The news that Iran is dragging its feet puts the ball largely in Europe's court. Many Americans were skeptical about the nuclear deal with Iran from the start given Tehran's track record, but even the Bush administration hard-liners were persuaded to give the Europeans a chance and at least test Iran's sincerity. The Europeans pledged that they were not prepared to be duped, and that Iran would pay a price for cheating or walking away from the agreement. If Europe fails now to hold Iran to its commitments, not only will Iran resume progress toward the development of a nuclear capability that would destabilize the Middle East, but America and Europe would be set on a diplomatic collision course that could resemble last year's crisis over Iraq: Americans alleging a weapons of mass destruction capability and considering the unilateral use of military force, with Europeans resisting that approach and calling for further diplomatic engagement.

To avoid that scenario, Europe must urgently make clear to Iran that it is not prepared to soften its earlier nonproliferation message. Continuing Iranian cheating, the Europeans should make clear, would lead the EU support to take the issue to the UN Security Council and to trade and diplomatic sanctions against Iran. The United States would certainly back this tough approach and it should make clear that if Iran does verifiably end its nuclear program Washington would also be prepared to develop its diplomatic and economic relations with Iran. The remarkable example of Libya—where the Bush administration is moving toward approval of trade and investment links, diplomatic relations, and the lifting of a longstanding ban on U.S. travel to the country in exchange for Libya's dismantlement of its weapons programs—makes such a proposal credible.

Even with concerted U.S.-European agreement on a package of carrots and sticks for Iran, of course, it may prove impossible to persuade the regime to abandon its nuclear plans. Indeed, support for a nuclear-armed Iran is so widespread in Iranian society that even a reformist regime—should such a regime ever actually take power—might not back away from the nuclear plans. Given the history of foreign interventions in Iran and the existence of other nuclear powers like Israel, India, and Pakistan in the region, to say nothing of the 100,000 U.S. troops in neighboring Iraq, any Iranian government will be reluctant to get completely out of the nuclear business.

But a credible EU threat to cut off trade and diplomatic ties if Iran violates the agreement, along with a U.S. offer to establish such ties if Tehran complies—could tip the balance in the right direction. The EU is by far Iran's leading trading partner, accounting for more than 37 percent of Iran's imports and absorbing some 28 percent of its exports. And the conservatives who just won the election to the Iranian parliament after many reformist candidates were banned know how unpopular they are with a burgeoning and youthful population desperate for jobs and development. They know that if they cannot solve their domestic problems internal revolution may prove their greatest long-run security threat, and that there is nothing a nuclear weapon can do about that. If Iranians can be persuaded that the price of nuclear weapons is economic and diplomatic isolation from a unified Western world, and that the reward for cooperation is inclusion and economic success, they might just put their nuclear ambitions aside.