Why do few nations dominate European cinema so much?

Germany had unique problems tip-toeing around issues of ideology and national identity for the first decade after WWII. It was a nation "on probation", so people were nervous about making or watching "serious" movies. But with the Wirtschaftswunder came a flowering of talent, most of it critiquing current social developments (Rainer Werner Fassbinder, Werner Herzog, Alexander Kluge, Wolfgang Petersen, Volker Schlöndorff, Margarethe von Trotta, Wim Wenders, etc)

Absolutely. Even non language art , symphonic music , was iffy.

The point with government start up was that England France and Italy threw Government money at their film industry because they understood its vital role in selling a revitalized nation to the world, even when showing bombed buildings. As allies they had a mechanism to sell to the US and stockpile American dollars. It was a product they could sell internationally.