Will they fall in love again with the birthplace of the Blue Angel?

A Pot-Holed road leads to the dream factory on the wooded fringe of Metropolis, past decaying tenement blocks and lakes of mud. Inside the gates, rubble is all around amid giant molehills that could be straight out of a science fiction set. We are at Babelsberg Studio, birthplace of German cinema and, according to the publicity blurbs, the Hollywood of tomorrow.

By the year 2005 this sprawling heap of brick and twisted metal will be transformed into an empire of glass and concrete; a realm of superlatives boasting the biggest film production centre in Europe and the most modern in the world. Some of the hi-tech has already arrived.

In the ancient hangar where Fritz Lang toiled away 70 years ago, technicians today fiddle with keyboards, enveloping flesh-and-blood actors in a virtual architecture at the click of a button. The power is still generated by a rusty device that might well have featured in a Frankenstein movie of the 1920s, but its cables snake towards a room stacked with a supercomputer furiously crunching gigabytes.

There is, of course, more to movies than money and machines, but Babelsberg also has the creative juices of one of the world's best film directors on tap. Artistic success is seemingly assured by the presence at the company's helm of Volker Schlondorff, a man who passionately believes in a bright future for German cinema.

Or at least he believed, back in 1992, when the bankrupt studio was bought for a song by the French Compagnie Generale des Eaux. Schlondorff moved to Berlin and promised a renaissance for the European film industry. Hollywood, he suggested, would finally get a run for its money.

There were many people even then who shook their heads in disbelief, but most seemed to have fallen under Babelsberg's spell. After all, the studio had a long tradition of defying reality, from the hedonistic days of the "Roaring Twenties", when it served up beguiling images of a wrecked country partying away, to the ensuing spectacle of blond supermen goose- stepping towards oblivion. Even in Communist times, the stirring epics about the interesting lives of lathe-operators and Westerns in which the Indians always won had some artistic merit.

But five years after Schlondorff took over Babelsberg, Hollywood it certainly ain't, and nor is it an up-market art-house. The Marlene Dietrich Hall, the movie studio where the actress made The Blue Angel, stands empty. The studios that are occupied are churning out soaps, chat shows and game shows for German television. Some movies did make money, but its biggest production. Schlondorff's The Ogre, a beautiful film about the war, underwhelmed the critics and sank in the German market last year without a trace. Its only, slim chance of recouping the DM27m (pounds 10m) invested is with foreign sales and video rights.

There are rumours, hotly denied, that Schlondorff is so dispirited that he is threatening to quit. His name still adorns the company letterhead, but the real power now rests with the French owners' employee, a manager named Pierre Couveinhes who climbed the corporate ladder of his native steel industry before embarking on a glittering career in water. Mr Couveinhes and his masters were always more interested in cash flow than art, and are now deftly repositioning Babelsberg in the market.

Future profits lie in television - yet more game shows - and the theme park. Fritz Lang's robot from Metropolis and gimmicks salvaged from more recent productions are pulling in the punters in their thousands. The company is also looking for post-production niches where its hi-tech expertise is almost unrivalled. Rather than compete with Hollywood, it is trying to entice big American studios to bring some of their work to Berlin. Babelsberg will become a "media city" with expensive apartments and wine bars.

That seems to leave the phoenix of German cinema firmly stuck in the ashes. They do not talk so big at Babelsberg as they used to five years ago. German movies, they now say, do not have a chance, because 80 per cent of the home market is occupied by Americans, and the language barrier keeps the rest of the world closed. Everything from funding - even Frankfurt banks invest in Hollywood, rather than Berlin - to marketing is stacked against Europeans. The box office hits in the past two years have been comedies, but German humour is thought not to travel well.

As for Schlondorff, he will no doubt make great films again, though perhaps not in German and not in Babelsberg. He is about to start work on a new movie, a thriller entitled Just Another Sucker. It will be made in America.