In Egypt we are still not at the end of the beginning. Its future remains in the balance.

President Mubarak now has raised expectations, only to dash them. This will greatly raise tensions and could lead to an explosion of violence if the army tries to clear the square. If violence escalates, the army will be discredited as a stabilizing force, which will greatly undermine the prospects for a transition to a stable democracy.

From the outset, the government and the army have chartered an incremental course, offering small concessions to try to calm the Arab “street.” The approach appeared to be working over the weekend, as things quieted down in Tahrir Square and Cairo went back to business. Then worker strikes started erupting all over Egypt. And now, despite news reports to the contrary, it seems as if Mubarak won't offer the concession of stepping down before the September elections.

So, what next? If past is prologue, the government will continue to try small concessions to defuse the situation. The other option, cracking down on the protestors, seems unlikely for now. A crackdown would have to involve the army. That would bring the legitimacy of the military, the only institution with any credibility, into question -- which in turn might dissolve the last source of stability in the nation.

Whether Mubarak stays or goes, in the short term, the key issue remains: Will there be a process that allows time and space for legitimate and more secular-oriented opposition groups to organize and make their case to the Egyptian people?

In fact, the latest round of protests revealed that what most Egyptians have on their mind are primarily “bread and butter” issues. What Egypt needs most desperately are economic reforms that establish a more liberal economy and generate jobs and opportunity.

The Muslim Brotherhood, perhaps the most well-organized and well-funded opposition group, is the least likely to deliver on that promise. While it is unrealistic to think that any parliament or transitional government will leave the brotherhood without voice, any transition process that exalts the Brotherhood at the expense of other voices would bode ill for Egypt’s future and the prospects for meeting the hopes and aspirations of its people.

The army remains the crucial player. It has to thread the needle between two bad ends: supporting a process that might hijacked by Islamist extremists, or a reactionary response that might tilt the country back toward authoritarian rule. The right course would allow leaders to emerge who will champion economic reforms and allow civil society to flourish.

For now, the best the White House can do is to work closely with the army behind the scenes to calm the situation and prepare the way for the most gradual and orderly transformation possible.

Regardless of the decisions made the next few days in Cairo, the situation will remain dynamic. The future of Egypt’s fledgling freedom will be tested. The Obama administration must remain engaged and on top of its game for a long time, and accept that Middle East policy is more than a distraction. It can’t simply focus myopically any more on paddy-cake diplomacy with Iran and the Palestinian Authority.

The U.S. is going to have to exercise real leadership if Obama does not want to go down in history as the president that lost the Middle East.