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BERLIN (Reuters) - It was more than just the historic settings in Berlin that drew Tom Cruise to Germany last summer to film his $80 million epic "Valkyrie" about a failed 1944 attempt to assassinate Nazi dictator Adolf Hitler.
It was also the cash.
The German government was able to show Cruise the money -- writing a check for 4.8 million euros ($7.14 million) for the MGM/United Artists' production.
A fresh source of film subsidy has injected new vigor into Germany's rich cinematic tradition, which before the Nazis took power in 1933 had been a great rival to Hollywood with classics like Fritz Lang's "Metropolis" and Josef von Sternberg's "The Blue Angel" featuring a young Marlene Dietrich.
"It's been a wundermittel (miracle cure)," said Dieter Kosslick, director of the Berlin Film Festival, which starts on Thursday. About 34 international co-productions got money last year under the scheme, known as the German Federal Film Fund (DFFF), although none is yet ready to show in Berlin.
"The DFFF is not only pumping money directly into the film industry but it's attracted larger investment in film projects from abroad as well," Kosslick told Reuters.
"The whole film industry infrastructure is being expanded and professionalized. It's a great leap forward."
Germany is not the only country luring international productions with cash. Singapore, Hungary, Canada and others offer handsome rebates to film production companies.
But besides filling production schedules at studios such as Babelsberg and Bavaria, the new fund -- worth 60 million euros' in rebates to 99 films including "Valkyrie" last year -- has helped revitalize cultural confidence in a country which lost much of its talent and infrastructure in the Nazi era.
Lang, Dietrich, Billy Wilder and others fled to Hollywood and the local industry was used as a tool by the Nazis for propaganda. It never really recovered, even after unification in 1990.
Now the 180-million euro programme that runs to 2009 has Hollywood, European and domestic filmmakers tripping over each other to make enough of their films in Germany to qualify.
The grants, up to 20 percent of a film's budget provided enough of it is spent in Germany, had a total economic effect of 388 million euros in production spending in 2007, its first year. They run alongside 230 million euros in existing German film board subsidies.
The fund has reversed a situation where for many years German taxpayers unwittingly helped finance Hollywood films -- many of questionable quality -- through private tax-shelter film funds. It was sometimes referred to as "Stupid German Money."
Germans were previously able to offset losses on investments in film, making the film funds an attractive option for thousands of private investors. They put 2 billion euros a year into them, and 70 percent of the money went to Hollywood.
The government first closed the "Stupid German Money" tax loophole in 2005 and then launched the DFFF, which Culture Minister Bernd Neumann said he hopes to extend beyond its initial three-year run.
"There's no more 'Stupid German Money'," said Kosslick. "Something like 20 billion euros of German tax money was squandered on Hollywood films hardly anyone saw. The situation is much better now. I'd call this 'Smart German Money'."
Business is booming at Babelsberg, which calls itself Europe's largest studio complex. There were 11 major films produced at the studios in Potsdam in 2007 with revenues of 245 million euros, up from just one major film in 2006.
"We're at the start of a sustained development," said Carl Woebcken, chairman of Studio Babelsberg. Berlin's status as a relatively inexpensive European city is another helpful factor, he added. "We're expecting the positive trend to continue."
Aside from the Cruise film, due out later in 2008, other international co-productions lured to Germany in the last year include the Wachowski brothers' "Speed Racer," which got 9 million euros from the fund, and Stephen Daldry's "The Reader."
There is also "The International," starring Clive Owen and Naomi Watts, and a Danish World War Two drama by Danish director Ole Christian Madsen, "Flame & Citron," starring Mads Mikkelsen, who played the villain in "Casino Royale."
"It's made it a lot easier to finance films," Fred Kogel, head of Germany's leading producer and distributor Constantin AG, told Reuters. Constantin's "The Baader Meinhof Complex," due out later in 2008 received 2.2 million euros from the fund.
DFFF fund representatives have even gone on the road in recent months to try to spread the word, sending delegations to Italy, Britain, France, Austria and Denmark to encourage more applicants.
Peter Dinges, head of the German Film Board (FFA), which administers the fund, said he was surprised how quickly the government grants had had an impact.
"We set out to improve the economic conditions for the German film industry and create lasting momentum for film production in Germany -- the two goals were accomplished faster than we thought possible," he said.
Editing by Sara Ledwith