When a film festival is bad, do you blame the films or the festival? Edinburgh is the oldest continuous film festival in the world, and, like some elderly relative, it has chosen to wear beige and settle for a quiet life. It's still the most important event in Britain and Ireland, but its decline signals that the Continent just does these things better.

If we blame the festival, we can't blame it too hard. Its budget of £300,000 is popcorn compared to the serious bucks available to Cannes or Berlin. Even San Sebastian and Venice get better funding than Edinburgh International Film Festival. Lizzie Francke, its departing director, has seen ticket sales boom in her five festivals, and you can't argue with that bottom line. Yet there has to be artistic quality, too, in which case Edinburgh is about safe returns.

Francke's strategy has been to offer retrospectives of established stars - Werner Herzog this year - to beef up Edinburgh's tradition of showing documentaries, then work like billy-o to get a few celebs along. Celebs don't just satisfy the Hello! factor, they are also a measure of how the industry rates any festival.

The big films had all done tours of duty at Cannes or Sundance, or were about to hit the multiplexes anyway. A festival needs discoveries to put a little chilli in the stew, and this had none.

It opened with AmΘlie, a huge box-office hit in France. Its gem was Atanarjuat, The Fast Runner, which had wowed in Cannes. The surprise movie was Planet Of The Apes - the surprise being that you paid £8 for a ticket the day before it opened on general release with tickets at half the price.

But it could just be the films themselves. In 15 years of attending festivals, I've never seen so many walkouts from industry showings. Nor have I heard so much chatter at the public screenings. You have to guard against jadedness at any festival, but to leave films and think "why did they make that?" is a bad sign.

The most exciting work was where the arts began to merge. In a strand of programming originated by Mark Cousins when he was director, the festival presented short films that seemed to borrow from video artists. The "persistence of vision" category had Chris Cunningham's Flex, which had been showing at the Venice Biennale. The Irish film-maker Clare Langan's Too Dark For Night was striking, as was Jean-Luc Godard's The Origin Of The 21st Century. These challenged the notion of film as an hour and a half of structured story.

While many movies were literary in origin - including adaptations of plays such as Disco Pigs, by Enda Walsh - the theatre world came out looking the stronger at this year's Edinburgh festivals.

The hit of the Fringe was the stage play Gagarin Way by Gregory Burke, with a pure film structure, while the International festival's Novecento had grown out of the film script for The Nineteenth Century. Theatre seems to have got the better deal out of this cross-genre fertilisation.

The highlights may have lit up other cities first, but that made them no lesser movies. Three hours of what used to be called Eskimos may sound like torture, but Atanarjuat, The Fast Runner is a wonderful film. The first to be shot in the Inuit language, it picks up where the documentary Nanook Of The North left off 80 years ago. In stunning landscapes of ice, snow and sea, a devilishly simple tale of evil upsetting a small community is told with mesmerising economy.

A documentary about a choir touring the fringes of Norway doesn't sound a barrel of laughs, either, but Cool And Crazy delivers in the same vein as Buena Vista Social Club. Exposing a world where singers risk hypothermia in the name of self-fulfilment and entertainment, it revels in the oddness of life.

Perhaps it is the fragility of the original tiger economy that prompts Japanese film-makers to be so creative, with two films showing wildly different extremes of a society in doubt.

Battle Royale was a hot ticket and rewarded viewers with a bravado display of joi de violence. In the near future, one high-school class is selected each year to live on an island and kill each other. A satire not just on reality TV shows, but also the society that spawns such programmes, it's wickedly funny.

At the other extreme, Eureka offers a three-and-a-half-hour meditation on life - in washed-out black and white. The driver and two young passengers are the only survivors when a bus is hijacked and several hostages shot. They try to continue their lives but can never escape the consequences of what they have witnessed. As a picture of urban alienation and the loneliness of modernity, it's strangely entrancing.

Israeli cinema posted a hit with Yellow Asphalt, about the relationship between the modern nation and its Bedouin population. It was just one of many films confirming that people across the world may not be interested in party politics, but remain immersed in political issues.

Pitch any of the above ideas to a European or American film financier and you'd be laughed out of the building before a cent had been mentioned. That's why movies such as Gabriel & Me get made. Another in the it-may-be-tough-in-the-north-of-England -but-that-doesn't-mean-we-aren't-sensitive school, it's the tale of a young lad who wants to become an angel. Billy Connolly is there as the archangel, but the film lurches away from whimsy to sentiment and never recovers.

It was one of many world premieres for British-made films, but few had the quality to deserve being seen much beyond these shores.

Philippa Cousins says her Irishness allowed her to see Wales as an outsider. She directs a great cast, including Susan Lynch, in Happy Now. It's an odd mix of murder mystery and comic quirkiness set in a remote Welsh village. Lots of nice ideas bubble away but never quite gel.

Better experiment than churn out the old formulae, however. Enigma premiered at Edinburgh and caused some excitement, because the stars turned out. Not having read Robert Harris's novel, I came without prejudice. I left without much of anything.

Bizarrely, there was much backslapping about Brits reclaiming their history from philistine US film-makers. Yet Enigma paints the effort to crack Germany's wartime codes as a John Buchan plot played by jolly heterosexuals.

As the key code-breaker, Alan Turing, was a homosexual made so miserable that he later committed suicide, it's hardly a landmark in historical accuracy.

If Enigma looks like a 1970s remake of The 39 Steps, then This Filthy Earth looks like an art-house episode of The League Of Gentleman. Shot on Super 8 and digital, it rolls in the mud of a timelessly inbred rural England.

While British film struggled to find a voice, the American independents were losing theirs. CQ was touted as Roman Coppola's calling card. Having a famous dad may be Coppola's burden, but it could equally be that he watched too many 1960s French and Italian movies.

His plot of an American in Paris who tries to make a quality film, while editing a bad sci-fi one, allows dull characters to introspect. If there's one golden rule, it's that the dull shouldn't think about themselves too much: it only hurts.

The Sleepy Time Gal tried a similar trick, but set in the United States. Jacqueline Bisset wondered about life as she died. The audience wondered how long it would take for her to die.

It was an all too common experience. The good films were very good, but the rest were aimless affairs produced for no apparent reason. The ones that worked told simple stories and played to the medium's strength - they showed things - whereas many others told us things we didn't need to hear.

So what if film is like jazz: stunningly inventive and revolutionary for a period, only to lose its way and repeat the old standards?

What if it's just dying?

Some blame would have to land on the writers and directors, too many of whom stick to the three-act formula and hackneyed subject matter.

They would say they are forced by the producers, who in turn would blame finance people who'll only back formulaic scripts.

Maybe we should blame the evolution of the entertainment industry, a perfect example of the economic law that the higher the profit, the more illusory choice becomes. Maybe we should blame Steven Spielberg, for basing a career on tapping the child within, rendering much of popular cinema infantile.

Maybe it's the critics' fault, for allotting 99 per cent of coverage to puff interviews. Or maybe it's just us. Maybe we've lost the ability to listen and watch simple stories that marvel in the strangeness of it all.

On Monday, Jemimah Bailey talks to Gary Mitchell about the film version of his play As The Beast Sleeps, which premiered at the Edinburgh International Film Festival last weekend