Ian Black on Muammar Gadafy's Remarkable Journey in From the Cold

No one paid much attention recently when Libya signed a deal paying compensation to the victims of the 1986 bomb attack on the La Belle discotheque in Berlin - but it was the final instalment in Muammar Gadafy's remarkable journey in from the cold.

The $35m cheque will buy a visit to Tripoli by Germany's Gerhard Schröder, following on from the colonel's triumphant arrival in Brussels earlier this year and Tony Blair's more understated trip to Gadafy's bedouin encampment. Last week, the US and the EU lifted their remaining sanctions and Colin Powell took tea with his Libyan counterpart at the Waldorf Astoria in New York.

Business booms when yesterday's pariahs become today's reliable partners. American and European companies are now fighting over Libya's vast reserves of cheap oil, while upmarket tourist companies zoom in on the magnificent Roman ruins at Leptis Magna. It is only a matter of time before the Jamahiriya (state of the masses) reaches agreement with the EU on policing its coastline to prevent desperate Africans washing up - alive or dead - on Italian and Spanish beaches. The imminent end to arms embargos is good news for western defence manufacturers. Prospects for human rights and democratic reforms for 5 million Libyans may be improving too.

Gadafy has spent the past five years energetically confessing and buying his way to international respectability. Handing over the two Lockerbie bombing suspects was the first great leap forward, but his master stroke was declaring his rickety arsenal of WMD last December - providing handy, if short-lived, compensation for George Bush and Blair for not finding any in Iraq. Since then, the bad boy has become a smirking teacher's pet: last week Libya called on Iran - facing growing pressure over its far more serious nuclear ambitions - to come clean about its uranium and allow independent inspections. A bit rich, but an extraordinary sign of changing times.

The blast from the past at the Berlin nightclub - two American soldiers and a Turkish woman dead - seems quaintly old-fashioned and small-scale in a post-9/11 world reeling from terrorist spectaculars like Beslan and televised jihadist decapitations in Baghdad. But it was a big deal when it happened: the immediate consequence was the US air raid on Libya, some planes, thanks to a compliant Margaret Thatcher, flying from bases in Britain.

Lockerbie was the next move, though there was never much that was mysterious about it. Long before he admitted ordering the downing of Pan Am flight 103 over Scotland, Gadafy gave the game away by referring to the 1986 US raid as "Locker A", followed by "Locker B". Hardline conspiracy theorists still refuse to believe Libya was guilty, suggesting bizarrely that the colonel confessed to a crime he did not commit. Eventually, he also paid up for bombing a French plane over Niger in 1989.

The story of Libya's rehabilitation contains some sharp lessons for our troubled world: sanctions that failed so disastrously in Iraq eventually worked in Libya, partly because Europe and America agreed, at least for a while. Patient diplomacy and creative thinking by Robin Cook and Nelson Mandela helped break the Lockerbie impasse, though this involved maintaining the fiction that only one man - now behind bars in a Scottish jail - was guilty.

Above all, Gadafy's transformation reminds us that in the old days of state-sponsored terrorism there was at least someone to strike a deal with, holding your nose and thinking of the profits when the file finally closed. Life would be a lot simpler if Bin Laden, Zarqawi, Zawahiri and co were on somebody's payroll, ran a small but wealthy country or sat on some enormous oilfields. But since they aren't, and don't, no happy end is in sight.