Does arcane lore only improve a thief's failure rate when reciting, or does it also act like spellcraft and raise the effective level at which the spells contained in the scrolls will be cast?

Arcane lore just moves a thief's scroll use to become equivalent with a mage. Basically, thief with 100% Scrolls and 100% Arcane Lore will fail scrolls identical (or nearly identical) to a pure mage with 100% Scrolls.

So far as I've ever noticed, when using a scroll, the level of the spell within is always preset, and nothing can enhance or diminish it (except perhaps the veil). So a hero character reciting a blindness scroll that contains a level 25 blindness spell against another hero, will find that the hero victim will have a very easy time making their save against it. The same can be said for talismans and wands.

Thief recite is a bit like reverse spellcraft. In that they don't get the full level of the spell. Presumably arcane lore would fix that.