John Rentoul: Small earthquake in Fife

The melodramas of drinking and sexual confession had not the slightest effect

Whoops. There goes another wheel off David Cameron's wagon. This may seem a curious reaction to a surprise Liberal Democrat by-election gain from a Labour government. But winning by-elections against the governing party is what the Liberal Democrats do. That, and running local councils. If, in a by-election, the Lib Dems field a strong candidate and the governing party field a weak one, it hardly matters what size of swing is required to take the seat. Nor do the Liberal Democrats seem to need a leader. Despite Sir Menzies Campbell apologising at every turn - "it would be idle to deny" his party's difficulties he says in his mannered, dated style - none of the melodrama of alcoholism and sexual confessions seemed to have the slightest effect.

The by-elections that really matter, however, are those where Labour and the Conservatives go head to head. In all the years of Margaret Thatcher's ascendancy, Labour failed to take a seat from her. It was not until the Vale of Glamorgan in spring 1989 and Mid-Staffs a year later that market sentiment turned. All of a sudden, she was gone.

That is where the Cameron wheel starts to work its way off the axle. Dunfermline was a hopeless prospect for the Tories - in fourth place with 10 per cent of the vote at the last election. But compare Labour's situation when Blair was on the threshold of the leadership, fighting the Eastleigh by-election in rich Lib-Dem territory. The Liberal Democrats won, but Labour came from behind to push the Tories into third place. In Dunfermline, by contrast, the Tory vote fell further to 8 per cent. Cameron's position now is not remotely similar to Blair's in 1994.

The big event of the Dunfermline by-election was not, in fact, its sensational outcome. It was a small but important instance of incompetence on Cameron's part. His team allowed an appeal to Liberal Democrat voters to go out in his name: "Issues that once divided Conservatives from Liberal Democrats are now issues where we both agree. Our attitude to devolution and the localisation of power. Iraq. The environment."

In their anxiety to meet local concern about Iraq, which has claimed the lives of five soldiers of the Black Watch from Fife, team Cameron went too far. Cameron has to take responsibility for that mistake, but then he compounded it with an unforced error of judgement that was his direct responsibility. Cameron knew that Labour had already seized on the leaflet as evidence of his "flip-flopping" on Iraq - Brown gave it to the Murdoch press, The Sun and The Times.

Yet Cameron got up for what has already reverted to Punch and Judy politics in the Commons and accused Blair of flip-flopping on schools. Bad idea. His flip-flop was more obvious than Blair's flip-flop. And the perception of flip-flopping is more likely to stick to him than to Blair, who has acquired a Thatcherite reputation for resolution - right or wrong - since the Iraq war.

Yet the tectonic event in British politics last week was almost nothing to do with the by-election at all - except in that it proved that obituaries for the Liberal Democrats were premature. The big event was the emergence of Chris Huhne as the likely leader of the Liberal Democrats. His momentum looks unstoppable. Last weekend YouGov carried out a survey of Lib Dem members for Sir Menzies' campaign, but the poll was not published, presumably because Sir Menzies' lead over Huhne of only five percentage points was embarrassingly small. But things were about to get worse for the Lib Dem acting leader, who has so far come across as a perfectly decent gent somewhat bemused by the flashbulbs. By the middle of last week, YouGov polled Lib Dem members again, this time for the Huhne campaign, which gleefully published the findings - a four-point lead for their man. With the mood flowing so fast in Huhne's favour, it suddenly becomes hard to see how he could lose.

This is a remarkable swing of fortune - even more dramatic than Cameron's emergence as Tory leadership favourite last October. A year ago, Huhne was an MEP. It seemed that the closest he would come to high office in London was the fact that he and Tony Blair once managed the same rock band. When the teenage Chris Paul Huhne left Westminster School for his gap year in 1971, he, like the future prime minister, dabbled in the music business. He put on a gig at Conway Hall, headlining a band called Jaded - who also had as a "promoter" one long-haired Tony Blair.

Next month, he could be facing Blair in the House of Commons. Liberal Democrats should vote for him, because he poses the greatest threat both to Brown and to Cameron. He is bad news for the Chancellor because he understands economics and he is bad news for the Tory leader because he understands green economics.

Cameron's green policies were already in danger of losing him another wheel. As one No 10 adviser told me: "He can have his windmill on top of his house and we'll have Crawley and the north Kent marginals, thank you very much." You may not approve of such brute electoralism (Labour's majority in Crawley is 37), but serious environmentalism is a problem for a mass party. Cameron may have been hoping to whisper sweet green nothings in the ears of the liberal middle classes, the stop-the-war bottled-water drinkers. Indeed, he had made a great start in wooing them, chronically disillusioned as so many of them are with Blair and New Labour. Now, along comes Huhne to outflank him with green policies that could actually work. Huhne knows more than almost any politician about the economics of green taxes - and, as a Lib Dem leader, he would have a huge advantage over Cameron in selling them. Cameron has to watch his back with C1s and C2s, as he devises Budgets for an alternative government.

Last week's by-election will be quickly forgotten. A revitalised third party will have a lasting impact - but it is likely to be felt more keenly by Cameron than by Brown.