In January this year the Babelsberg film studio in Potsdam, Germany, kicked offits centenary in some style as the locally-made thriller Unknown, starring Liam Neeson, topped the US box-office rankings on its opening weekend. In its glory days Babelsberg was second only to Hollywood and attracted directors of the calibre of Fritz Lang, Billy Wilder and Alfred Hitchcock. In the past decade it has made a triumphant comeback as a centre for big- budget international productions, including the Bourne franchise, Valkyrie and Quentin Tarantino’s Inglourious Basterds.

Like the studio, Potsdam itself has undergone a renaissance since German reunification, with a new university, UNESCO World Heritage status and the highest standard of living of any Land

capital in the former East Germany. A few kilometres from Babelsberg a real-life version of Back to the Future is playing out as the city pieces together its historic core, reconstructing key monuments lost to Second World War bombs and post-war demolition. On 16 February, the foundation stone was laid for the rebuilding of the Stadtschloss, the royal town palace whose ruins were blown up by the East German authorities in the late 1950s.

Historical reconstruction is fraught with controversy in Germany, where modernist objections are accompanied by suspicions that tidying up the 20th century’s visual scars makes it easier to prettify the uglier aspects of that century’s history. It’s a particular issue in Potsdam, the ‘Prussian Versailles’, at once a royal residence closely associated with Frederick the Great and a garrison town long regarded as the spiritual home of Prussian militarism.

Yet the Stadtschloss is not being reborn out of resurgent militarism, nor even nostalgia. Dresden-born project architect Peter Kulka is no arch conservator: in a speech in 2010 he said: “For me, what counts is that reconstructions – like for instance in Potsdam and Dresden – can only be accepted in harmony with good new architecture, a meaningful use and convincing execution.” To this end, behind the recreated facades and sweeping staircase of the Stadtschloss will be a contemporary home for the government of the Land of Brandenburg – in Kulka’s words, not Frederick the Great’s city palace any more, but a modern parliament. It will cost an estimated €120m-€135m, with recreation of the historic facades made possible by a donation from software tycoon Hasso Plattner. Construction work by Dutch contractor BAM is scheduled to be completed by early 2013.

Even a replica jewel needs a setting, and in Potsdam the parliament will be the focal point for the rejuvenation of a 30.3 hectare site, part funded by the EU and expected to attract substantial private investment. The Stadtschloss’ main portal is already rebuilt, facing Schinkel’s domed, neoclassical St Nicholas’ Church and the Altes Rathaus (old town hall) across Alter Markt, which was once Potsdam’s liveliest square and will now be so again, after half a century in which its southern side was a windy void. The square has already been relaid at its historic level, which in places has meant lowering the paving by up to a metre. Following substantial restoration work, the church provides visitors with a viewing platform 40m above street level offering 360-degree views of the city; work continues to convert the old town hall into a new Potsdam Museum. Between Alter Markt and the river Havel, dense mixed- use development will restore much of the area’s former vitality; on the square’s western flank a 70s-built library is being redesigned as a contemporary ‘knowledge warehouse’ with a light-flooded atrium; completion is scheduled for 2012.

West of the Stadtschloss, demolition of more communist-era buildings will make way for a lively mixed-use commercial, cultural and residential quarter around Neuer Markt, where a number of historic houses have been restored. Potsdam’s film museum – in the Stadtschloss’s former stable block – already provides a visitor focus. A modern synagogue and Jewish community centre close to the site of the one desecrated on Kristallnacht and destroyed in 1945 will ultimately provide a spiritual counterpoint to a reconstruction of the old garrison church, a Baroque masterpiece demolished in 1968 and – for all its uneasy military associations – as powerful a symbol of old Potsdam as the Frauenkirche is of Dresden.