HOLLYWOOD ON THE RHINE : Forgive the Geographic Stretch, but Someone Is Trying to Resurrect What Was Once One of the Greatest Film Centers in the World--Babelsberg, Germany.

It doesn’t look like a dream factory, what with the chuckholes pocking the road just inside the front gate and the heap of sand that construction workers have left right in front of the executive offices. The studio gate is but a gap in the barbed-wire fence; even the guard who comes out of his hut to greet visitors is rumpled.

Herr Direktor Volker Schloendorff? Ja, ja, of course--his suite is right over there, second floor, in that grim business of a red-brick box. Not much of an office for a big-shot studio executive.

This is Babelsberg, the once-triumphant German rival of Hollywood, once the largest studio in Europe, where, beneath a canopy of pines on the outskirts of Berlin, pioneer filmmakers did their tricks with light and celluloid. Here Marlene Dietrich put on her top hat and rasped out “Falling in Love Again” in “The Blue Angel.” Here Friedrich Murnau conducted his experiments--long before the age of cranes and dollies--with cameras strapped to the torsos of bicyclists and fire-engine ladders. Here, too, Fritz Lang shot the stunningly futuristic “Metropolis” in 1926, assessed by some as the greatest science-fiction film ever. It was no accident that Babelsberg emerged in those days as a film nexus. During World War I, the German government had realized the propaganda value of film and set about creating a top-flight national industry. After the Kaiser fell, the huge studio--called Universum-Film-Aktiengesellschaft--lived on. A whole school of cinema, called German Expressionism, was born here, and its menacing figures, bizarre, shadowy sets and claustrophobic feel would influence such directors as Orson Welles for years to come. With the advent of sound, Babelsberg truly came into its own, for the confined and stagey look that its directors were trying to achieve meshed perfectly with the restrictions of the bulky, fixed sound equipment that was causing so much consternation in Hollywood.

Of course, you would never know any of this to see Babelsberg today.

The stock market crash of 1929 and Hitler’s rise in 1933 dealt the German film industry blows from which it has never really recovered. The Nazis banned all Jews, who had been the creative backbone of the industry, from filmmaking; later, Babelsberg was taken over by the Reich’s Ministry of Public Enlightenment and Propaganda, with Joseph Goebbels personally approving or rejecting each new project.

Before long, Babelsberg was churning out Viennese operas and sentimental comedies, and free-thinking German artists were fleeing en masse to Hollywood--Billy Wilder, Peter Lorre and Paul Henreid among them.

After the war, the aging buildings at Babelsberg remained in the impoverished East. The physical plant crumbled; the hardware fell ever further behind the times. Oh, films were made here--1,300 of them counting television projects--and some have even earned critical praise and found their way onto the German cult circuit. But without a decent international distribution system, the entire Babelsberg oeuvre remained virtually unknown to the rest of the world.

By the time Germany reunited in 1990, Babelsberg was in such desperate shape that the government thought it had no choice but to plow the place under and make way for apartments and malls.

That was when Volker Schloendorff surfaced in Berlin. A child of the New German Cinema movement and the director of the Oscar-winning film “The Tin Drum,” he had just completed his unsuccessful film adaptation of “The Handmaid’s Tale” and was looking around for some other, more promising project.

When he heard that huge, historic Babelsberg was lying fallow, he couldn’t believe his good fortune. “I thought it would be a dream, to have a production facility in Europe that could handle movies of an American size, but with European substance and content,” he says, sitting in his small second-story office in a 1937 building whose harsh, rectilinear lines and ranks of square pillars seem to shriek Third Reich.

So Schloendorff has taken two years off from filmmaking to do whatever it takes to rescue Babelsberg--wrangling building permits, fighting off historic preservationists, queueing hat in hand for state subsidies, trying to convince the European Commission that such aid is permissible under European antitrust rules. “If it will help the business and the workers, I will even do the striptease on the studio roof,” says the director.

Schloendorff says that few of his European film-industry friends understand why he’s wandered off on the Babelsberg tangent, though his Americanfriends are applauding the gamble. The Americans, he thinks, can appreciate someone with a pioneering spirit; the Europeans, he says, are either terrified thathe will succeed and become a rival, or else are so jaded that they think he’s a foolish dreamer. “They don’t seem to believe there’s any future in this,” he says. “They seem to have lost their vision. They are all dying to go to Hollywood.

“When does a filmmaker have the chance to build [part] of a city, rather than just a set?” he goes on. “I think there’s as much creativity to be deployed in this than in any script I’ve ever worked on. I just hope one day it will be visible.”

When he’s through, Schloendorff hopes to have fashioned a lever for the revival of the entire German film industry--in a country where the production of such acclaimed works as “Das Boot” has been eclipsed by the shooting of schlocky TV shows, a country where the cinemas are packed, but more than 85% of what they screen comes from America. “Things can’t stay the way they are,” says Schloendorff. “There is no reason that European film is dead forever. The entire planet can’t always buy all its entertainment from Hollywood.”

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In 1989, the Wiesbaden-born Schloendorff was still living in New York, where he had moved in 1984 to direct such films as “The Handmaid’s Tale” and TV productions as “Death of a Salesman.” He was flying along on the Pan Am shuttle one day when the pilot came on the speaker system with word that the Berlin Wall had fallen. “Then and there, I decided to return to Berlin,” Schloendorff says. “I didn’t know what for. Just to be there.”

Back in Germany the following year, Schloendorff learned that the government had acquired all East German collective farms, factories, and other commercial properties for resale to private investors. The Treuhand, the official privatizing agency, had been trying to peddle Babelsberg to practically every big media concern in the land.

No one with enough money to buy the place found it the least bit attractive. Already, Germany had two major studios capable of producing feature films, and in an age when German movie-goers are flocking to Hollywood films, both had already decided to give up on movie-making and produce for TV.

The Chase Manhattan Bank office in Frankfurt concluded that Babelsberg had only one thing going for it: its land. Babelsberg’s 110 acres of sound stages and prop storerooms lie less than two miles from where the barbed wire and guard dogs of old East German death strip used to separate the East from the West, and just over the border from leafy and villa-studded Wannsee, one of greater Berlin’s most prestigious and expensive residential districts. Good rail and highway links connect it to Berlin. The quicker the movie-making staff could be laid off, the quicker the government could sell the plot to a developer.

“I said, ‘This is nuts!’ ” Schloendorff recalls. “This”--and he gestures toward his window, to the mud and sand hills, the time-worn sound stages and shabby East German buildings with moss growing out of their roofs--”is like a gift that comes down as an accident of history, through no merit on our part.” He smiles fondly, adding, “that view was considered, by German bankers and producers, as pure lunacy, and still is today.”

But Schloendorff seems to be the type who can’t pass up a challenge. He didn’t stop when French colleagues warned him that no one--and certainly not a German--could possibly adapt Proust to film as he did with “Swann in Love.” And he filmed his 1981 “Circle of Deceit” in war-riven Beirut.

Now, his challenge lay in convincing potential investors that there was more to Babelsberg than a plot of land, cluttered with East German film artisans kept busy making props for trade fairs and management seminars. Schloendorff discovered that these seeming undesirables were, in many cases, the third generation of families who had been sewing costumes, hammering together sets, and painting backdrops since the studio opened in 1912. “I found out they had incredible technical backgrounds,” he says. “It was just their tools that were derelict.” Bring in some money, he thought, keep the heritage alive, and “sooner or later, the creativity will come out.”

But where to get the money? Schloendorff and some friends made a promotional film pitching the merits of the place as a kind of European Hollywood. They sent the cassette out to every studio they could think of. In 1992, after getting no nibbles from the American and Japanese investors, they got a call from the huge Compagnie Generale des Eaux, one of the largest industrial conglomerates in France. CGE is best known as a distributor of drinking water; its second-largest revenue source is heating oil.

But no sooner did the French make their interest known than a rival bidder emerged: the Munich-based advertising and industrial film-maker Hans-Joachim Berndt. He said that he, too, wanted to save the historic studio and warned that the French connection could be bad news for Germany. Water pumpers! How could such an enterprise possibly grasp the legacy of German film?

But Schloendorff, who spent his early years in France as an assistant to directors Louis Malle and Alain Renais, mounted a counter-attack. CGE had already gone into television production and was the biggest provider of cable TV shows in France; it owned production studios in Boulogne and Paris.

Besides, Berndt looked to Schloendorff like a front man for Germany’s production Establishment. “They were afraid we might succeed,” he says. “They hate Berlin, and imagine how much they hate East Berlin.”

The last-minute flurry of big-bucks interest drove up the studio’s purchase price. CGE had already crunched the numbers and concluded that Babelsberg could break even after modernizing investments of 100 million marks, or about $74 million. Now it promised the Treuhand to invest even more than that--410 million marks, or about $304 million, over the first four years (the pledged amount has since been increased)--and to preserve the jobs of the 800 East Germans who still remained at the site. CGE even agreed to underwrite nearly half the construction of a new highway for the surrounding city of Potsdam.

It won the bidding--and asked a surprised Volker Schloendorff to become its studio manager.

“I couldn’t say no,” says Schloendorff, who claims he had set out only to help rescue Babelsberg, not to run it. In the beginning, he adds, he was “more like the janitor than the chairman of the board.”

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Even without the additional capacity of a revived Babelsberg, there is far more studio space in Germany than audience interest in German film. The state-subsidized New German Cinema movement of the 1970s, which gave the world such art-house favorites as “Lola,” “The Marriage of Maria Braun,” and “Aguirre, the Wrath of God”--and which gave Schloendorff his start with the prize-winning “Young Torless” in 1966--eventually became too insular and precious for even the most adventuresome viewers. After the 1982 death of the movement’s most prolific film-maker, Rainer Werner Fassbinder, the New German Cinema faded into oblivion.

The German government still subsidizes film-making, and, nationwide, about 100 films are completed here each year. But about a third never make it to the theaters and many of those that do flop.

Critics say part of the problem is the subsidies themselves; over the years, politics has come to play a greater role than talent when it comes to funding. Under these frustrating conditions, many of the country’s most ambitious young directors simply give up and go to Hollywood. That’s a principal reason for the decline in the quality of German films and the number of Germans who go see them.

The plight is far from unique to Germany. Across Europe, moviegoers are lining up to see “Le Roi Lion” and “Forrest Gump.” Continent-wide, yearly attendance for European films has fallen from 600 million in the early 1980s to 100 million, while viewership for U.S. films has held steady at about 450 million.

Analysts agree that each national film industry is too small to be any match for Hollywood’s powerful advertising and marketing juggernaut, that Europe suffers from a lack of transnational distribution networks and that filmmakers aren’t making what people want to see in the first place.

But no one seems to know what to do about it, any of it. Francehas been pushing for tighter import restrictions on non-European works, but other Europeans fear that such tools would discourage investment. Other cultural officials recommend increased subsidies for the development of continent-wide distribution networks.

Schloendorff--who has already won some of these subsidies--thinks the trick will be to make Babelsberg attractive enough to draw top European talent, stanching the brain drain to Hollywood. He started with the sound department, hiring top talent and putting $7.6 million into the conversion of another of those Third Reich-era buildings, renovating the interior and installing digital editing suites where mixers need not resort to transferring sounds clumsily on miles of tracks of tape. He also converted a beast of an old orchestra hall into a huge mixing studio, where technicians can hear exactly how their films will sound when screened in a large theater.

“It’s quite a remarkable facility, even by U.S. standards,” says Michael Bard, vice president of the sound-design firm Newton Bard Inc., who came to Babelsberg recently to do sound effects for “Star Command,” a two-hour pilot for a TV adventure series being produced jointly by a Paramount subsidiary a German TV production company. With the new equipment, Bard says, “you can spend more time doing the work and less time fooling around with machines. Right now, that’s the main reason people would come here. And also the people. These people really want to work. They don’t have the attitude that they can take it or leave it.”

But will state-of-the-art equipment and an accommodating technical staff prove enough to overcome the drawbacks of working in Germany? The worst of these, of course, is the mark’s inexorable rise against the dollar, which has brutally increased the cost of doing business in Germany, which already has the highest labor costs in the world.

But there is also the reluctance, Schloendorff admits, on the part of some Jewish-American film-makers, to come and conduct their affairs on the outskirts Hitler’s capital. The days of the stiff-arm salute are long over, but there are isolated but alarming incidents of racist brutality and anti-Semitism in Germany. “Who would blame a victim of the Holocaust if he said, ‘I’m sorry, but I’d rather not bring my money to Berlin, I’d rather go to Prague or Rome’?” Schloendorff asks. “Berliners are not aware that they have to try much harder than others, in order to overcome this. Now [that the Wall is gone,] they’re a city like any other, and they’d better prove that they’re more tolerant than others, and more cosmopolitan.”

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Babelsberg’s future may be clouded by such questions, but that hasn’t deterred its would-be saviors from driving their earth-movers onto the studio grounds this spring and setting up their cranes. The alleys and lanes at Babelsberg are a mass of open trenches and heaps of dirt at the moment, as crews lay a fiber-optics network in a region where, just five years ago, you had to have a political connection just to get a rotary phone.

A glitzy new studio building is being completed just north of the forlorn-looking old “Marlene Dietrich Hall” where “The Blue Angel” was filmed. (The renovators are not allowed to tamper with such historically significant buildings.) Before winter, Schloendorff and CGE hope to begin construction of what they call a “high-tech center.”

The old East German staff--augmented by the outside talent that Schloendorff has brought in--is busy once again with real movies, not just dispiriting government make-work. In the two years that Schloendorff has been nurturing Babelsberg, 21 films and made-for-television movies have come off the line here, including “The Never-Ending Story Part III,” “La Machine,” “Catherine the Great,” and “Victory.” The most recent project has been “Star Command,” which caught the German movie-going public’s attention with the size of its budget: $3 million. Not often do Hollywood studios come looking to spend such sums in Germany these days.

Still, Babelsberg lost money in 1993, the most recent year for which final results are available. (For all the bustle in the mixing studios, the only department to show a profit that year was the studio tour--visitors can prowl among the old sets, watch stunt men demonstrating simple tricks, and have their faces made up by former East German make-up professionals.)

“When we looked at the place, we said it would be impossible to make the studio profitable in the short term,” says Pierre Couveinhes, the French steel executive whom CGE sent to Germany to run the studio’s business side. And so, the new production studio, now nearly completed, will be leased to television production companies, which will doubtless use the space to make all manner of un-Schloendorffesque sitcoms and advertisements.

“The irony would be if I saved this place only to do soap operas,” says Schloendorff. “But at this point, I don’t care. We have to bring this place back to life.”

So far, going commercial appears to be paying off. Bertelsmann AG, the world’s second-largest media group, has agreed to base its Berlin operations at Babelsberg. The city of Potsdam plans to move an existing film school onto the grounds, and the Brandenburg state broadcasting network will make Babelsberg its home.

Thirty acres of Babelsberg is even to be given over to precisely the sort of real-estate development--malls, townhouses, restaurants, hotels and the like--that Schloendorff’s opponents warned would crop up when he brought those suspicious French water distributors to town. But some of those who doubted Schloendorff’s concept three years ago believe in it now: Let the movies lend glamour to the real estate, let the real-estate earnings help finance the movie-making.

Schloendorff, meanwhile, feels comfortable enough that this summer he is returning to his first love: filmmaking. In July, he plans to begin shooting a film based on the French novel “The Ogre.” The outdoor scenes will be shot in Poland, but the rest, of course, will be done at Babelsberg.

“I think it’s a wonderful dream,” says Wolfgang Jacobsen, a film historian with the German Cinema Foundation. “Maybe it cannot be realized. Maybe the studio will die, and all that will be left will be some real-estate properties. We will know in about five years. Maybe Schloendorff will be an exception.”