Kishwer Falkner: We must face up to a new political landscape

While Cameron may be untested, his bid for our political ground is irrefutable

A new leader through "coronation" or "contest" are the choices facing a newly elected Liberal Democrat executive committee at its meeting this evening. The former would anoint Sir Menzies Campbell, the only contender who has thrown his hat in the ring, and the second, wait for it, will probably also elect him as leader, according to polling predictions. So far, so good.

But in his resignation speech, Charles Kennedy warned the new leader of the contents of the in-tray - serious internal issues which need to be resolved. Kennedy is right. This is a critical moment for the Liberal Democrats. But his warning that the new leader should not get "unduly distracted by the machinations in other parties or what the vagaries of the British voting system may offer up at a future general election" does not convince.

It is the fact that the ground has shifted under our feet, and the importance of political "positioning" for a third party, which has culminated in the events of the last few weeks. Success at the ballot box is about political credibility, which will have to be demonstrated in a new political environment, against a Brown government-to-be and an as yet policy-lite but successfully rebranded Conservative Party under David Cameron. It cannot be business as usual.

So what are these serious internal issues? While there is considerable solidarity within the Liberal Democrats as a whole as to its philosophy - individual liberty, human dignity and justice, respect for the environment - there are differences between the MPs and campaigning activists, with the wider membership somewhere in the middle.

The differences, mainly around economic issues and spending priorities, are not new. The tensions between economic and social liberalism - which go back in modern times to Maynard Keynes - were largely resolved by Jo Grimond in a different context, and emerged latterly with Ashdown and Kennedy. Whereas Ashdown engaged passionately with the activists but ultimately stared down dissent, Kennedy attempted to manage the tensions, more as a chairman than chief executive, eventually leaving them unresolved.

This strategy worked in the 2001 parliament. Our major test of political credibility under Kennedy's leadership came when the Conservatives sleepwalked with the band of brothers that are Blair and Bush into the Iraq war. This provided us with an opportunity to say clearly what we believe in - civil liberties and the rule of international law.

But moving from historically favourable conditions to the more mundane role of performing credibly against a resilient Prime Minister and a resurgent Conservative Party calls for more than papering over the cracks between MPs and activists.

A third party in a structurally biased two-party system is more vulnerable to a "squeeze" at times of political change. This, coupled with the fact that almost three quarters of Liberal Democrat MPs have the Conservatives as their main challengers, makes them more conscious of the Cameron effect. While six million voters have supported the Liberal Democrats, it is also clear that voter loyalty among Liberal Democrat supporters is weaker and liable to be more influenced by the political issues of the day than the relatively tribal core vote of both Labour and the Conservatives.

There are several challenges. The Liberal Democrat policy review which is due to report in September was tasked to look forward in a longer timeframe than an electoral cycle. This acknowledged that today policy solutions are of a different order than in the past.

To take only three, dealing with a pensions crisis, the funding and efficient delivery of a universal health service, and energy policy against a backdrop of wider environmental concerns, all have to be rethought at a time when more public spending of itself cannot deliver the public goods we want. For activists who tend to dislike changing tack, particularly where this involves tough economic priorities, this will be a difficult transition.

Many voices in the party will be inclined sotto voce, to urge caution. But the "do nothing" option is no longer an option.

We may have missed opportunities in the past, but we must now face up to tough choices and sharpen our identity. Moreover, while policy is important, ideology is where passion is conveyed. This needs a political narrative saying who we are, where we want to take the country and how we propose to get there. This narrative will have to be thought anew to reflect new realities. Therein lies the challenge, whoever leads the Liberal Democrats.

Baroness Falkner speaks for the Liberal Democrats on communities and local government in the House of Lords, and is a member of the policy review 'Meeting the Challenge'