This movie disturbed me when I was a child. I saw it in the 80s and it was shown on a projector at my local library (Denmark).
It was live-action, realistic, current age, but with some fantastical elements. The movie was almost certainly dubbed and I don't know the original language.
Plotwise, it was about a group of kids. I don't remember adults being in it much.
At one point some villains have abducted the kids and they turn them into some sort of gnomes, using a machine. The wrinkled faces on the kids freaked me out a lot at the time. After that, the deformed kids were set to work in a factory or mine.
At one point, there was an escape with the help from some of the kids where one or more of the deformed kids were rescued.
I believe there was a happy ending where they are sailing on a barge, singing. I don't remember if all the kids were turned back to normal at that point.
EDIT: I talked to my brother about this film. He remembered it, and thought it might have been Central or Eastern European. He said that I remembered more about the film, but that he also found it very disturbing at the time.
I also contacted the library in Denmark that showed the film, but they have no records or programmes from these events. The only idea I have left is to go the local newspaper and find out if they have archives that may contain advertisements about these movie events.