Hey,
Not to sure about campaign difficulty, wondering about that myself, but I quess it effects enemy AI and maybe number of enemy ships/planes that spawn or show up on your map. Torpedo failure rate might also be affected, but can't say anything for certain.
What I do know is that you can change realism settings mid-campaign when you're in port (office). If you look to the left there is a radio or something:
Click it and you can change you're options. I think you have to do it every time you start a career (I "had" to do several restarts because I forgot this).
Hope it helps.
