It's 20 years since reunification but is Germany still divided?

Most visitors to Germany's reunited capital wouldn't recognise it as such, but there is still a bit of original Berlin Wall left standing in the city's Bernauerstrasse – a street once famous for daring escapes from the former Communist East to the West. The section stands on a piece of litter-strewn wasteland and is little more than 50 yards long. The concrete pipe that used to run along the top of it – to thwart any attempt at climbing into capitalism – has turned black and is falling off. The Wall's once comparatively smooth, graffiti-smeared surface has been picked to the bone: souvenir hunters have hacked away at it so completely that there is not much left beyond the rusting steel-reinforcement rods that somehow hold it together still.

So much for conserving it as a chilling memorial to the Cold War: 20 years after its historic fall on 9 November 1989 and the collapse of nearly all of the Eastern Bloc's Communist regimes, Berlin has for the most part dumped what is left of its infamous Wall into history's dustbin. The only section that has been kept for posterity is a 1,000-yard stretch called the East Side Gallery, which is covered with murals painted by artists from throughout Europe in early 1990. But this part of the Wall has fallen into such serious decay that most of it has had to be completely rebuilt for this year's 20th anniversary of its demise. The artists have been recalled and paid 3,000 euros a head to repaint their pictures.

A few sections of Wall were bought at the time by wealthy Americans and millions of hacked-out bits have been turned into post-Communist paperweights that now sit on desks across the globe. The rest has been ground up and used as underlay for the new autobahns that stretch across the unemployment-plagued former Communist East – nowadays more optimistically referred to as the "New Federal States".

In an attempt to recreate the eerie and menacing atmosphere once exuded by the Wall's watchtowers, floodlights and Kalashnikov-toting guards, a private entrepreneur has built an ersatz, Disneyland-style mock-up of the original in the Bernauerstrasse. It's now a favourite tourist attraction. But just a few yards away in what used to be Communist East Berlin, in the city's once-blighted district of Prenzlauer Berg, the full impact of the monumental changes that have taken place since the Wall fell will come as a shock to anyone who saw the place during the city's division.

The haunting German film The Lives of Others, which tells the story of how an East Berlin writer and his girlfriend are kept under round-the-clock surveillance by the infamous Stasi secret police, provides an inkling of what Prenzlauer Berg was like 20 years ago. The district, which used to sit close against the Wall, was not massively damaged by Allied bombing during the Second World War, but it still looked as if the war had ended yesterday. The borough, which incidentally used to be twinned with London's Hackney during the latter's socialist heyday, contains street after street of late-19th-century apartment blocks. Two decades ago, the facades of all of them were either falling off or pockmarked with the holes of millions of bullets sprayed on them by the invading Red Army (the tactic was designed to deter snipers) as they took the city in May 1945. The district stank of a soft brown coal called lignite, which was used to heat people's homes, and two-stroke-engine car exhaust fumes. It was home to academics, dissidents and intellectuals but also to Communism's failures and rejects, those without enough friends in the ruling Socialist Unity Party to warrant a decent apartment.

Prenzlauer Berg is no longer twinned with Hackney. Perhaps that is just as well: in the interim it has transformed itself into the Berlin equivalent of Islington – a yuppie enclave in a city which has been affectionately dubbed "poor but sexy" by Klaus Wowereit, its gay Social Democrat mayor. There is not much poor about Prenzlauer Berg, however: once the city's punk borough, it has come of age and is now home to a baby-boomer population of trendy, young, middle-class and educated Germans. Its streets, which once had the odd Trabant or Russian Lada parked in them, are now full of Audis and BMWs. Children cavort in the well-organised playgrounds that have been set up on what seems like every inch of green space. They, like their parents, are dressed in designer clothes, while babies are wheeled about in pristine prams costing 1,000 euros apiece.

East Berlin's most radically altered district could be considered a glowing (if slightly irritating) advertisement for the new Germany of Angela Merkel, its first woman Chancellor, who happens to live just outside its borders. It is an area in which the promise – made back in 1990 by Helmut Kohl, Germany's unification Chancellor – that East Germany would "blossom" seems to have come true at last. Yet it is also a stark reminder that the fall of the Berlin Wall has resulted not so much in Germany's reunification as the West's wholesale annexation of the former Communist East.

Gentrification has hit Prenzlauer Berg at a speed unmatched even by the most tarted-up quarters of other European capitals. Ninety per cent of the district's apartments have been vacated by their original East German inhabitants since the Wall's fall. They have been replaced by a generation of young Germans who have arrived as rich invaders from the West. The standing joke in Prenzlauer Berg is that the borough is populated exclusively by Swabians from wealthy south-western Germany. Like most jokes, it contains an element of truth.

The first building to confront visitors as they emerge from the district's Senefelder Platz metro station is a mammoth, yellow-painted, organic food supermarket. It is the biggest of its kind in Europe and run by a chain called LPG – an ironic dig at the former East because the initials were once Communist-party jargon for a state collective farm. LPG does a roaring trade with its environmentally minded customers, who live in the immaculate turn-of-the-century apartment blocks – now restored to their former Imperial German glory – that surround the district's fashionable Kollwitzplatz square. During the recent European elections, the Greens won between 48 and 60 per cent of the vote in Prenzlauer Berg constituencies. Oysters and Prosecco are standard fare at the quarter's Saturday market, which is flanked by a wide selection of French resturants and Italian-run cafés selling expensive Latte Macchiato to drink on the premises or "To Go". The nearby Kastanienallee avenue boasts more organic foods stores and an array of funky shops selling retro furniture and clothes.

One of the main concerns exercising the minds of the quarter's Green politicians nowadays is whether to retain its quaint Communist-era street lamps. Most of the new residents agree they are a wonderful piece of retro chic, but unfortunately they also waste a lot of energy.

Annette Friedrichs and her husband Theo, both in their early thirties, came to Prenzlauer Berg from Hamburg and Munich in the mid-1990s. They both enrolled at Berlin University. "It was the place to be, the rents were dirt cheap and the parties were wild," Annette recalled as she bounced her baby son on her knee in Kollwitzplatz square last week. However, she admitted that since her arrival more than a decade ago, the rent for her 100sqm apartment has quadrupled. Theo, who now works as a meteorologist in Berlin, insisted that neither of them would ever dream of leaving. "There is a good sense of community. With so many children about, everyone is the next man's babysitter," he said. For the other factor that makes Prenzlauer Berg special is that it has the highest birth-rate in Germany. At times, when strolling along its admittedly wide pavements, it is not unknown for pedestrians to run into a pushchair traffic jam.

Prenzlauer Berg owes its near-instant gentrification to developments in the property market immediately after the fall of the Wall. Many of the original, pre-war owners bought back properties which had been confiscated under Communism or expropriated by the Nazis before the Second World War. Most apartment blocks were then sold to property developers who gentrified the buildings with the help of state-funded grants. Many East Berliners have thus found themselves forced out by the Western invaders – and for all its prosperity, the effect is unsettling: walking around the district or sitting in one of its numerous cafés, means being surrounded by what seems like a cloned generation of white-middle-class Teutons. There is hardly a non-European face or anyone over 40 to be seen. "We are stuck with a monoculture," admits Dr Michael Nelken, a 57-year-old Berlin city councillor who lives in Prenzlauer Berg. "We are trying to attract people from other sections of society, but it is not easy. This is what gentrification does."

Baerbel Bohley is a longstanding Prenzlauer Berg resident. A painter, she was also one of the East Germans who led the protest movement against the Communist regime back in 1989. Her flat in Fehrbelliner Strasse was once a meeting place for dissidents, and she was arrested and imprisoned twice for her activities. Now 64, she is planning to leave Prenzlauer Berg for good. Having just returned from several years in Bosnia, she is shocked by the changes in her old neighbourhood. "It's too much for me nowadays," she says.

Even in a slight breeze, 60-year-old Steffi Schultz has to clamp shut all the windows in her Seventies-built tower-block home in the town of Eisenhüttenstadt, close to Germany's border with Poland. Opposite her kitchen window, a giant articulated hammer-drill controlled by faceless men in masks, goggles and helmets, bites its way into yet another of the 7,000 Communist-era flats that were completed in the year the Wall fell. They are all now being demolished, and despite the water jets that play constantly on the smashed living rooms, bedrooms and bathrooms from the bulldozers, the dust is everywhere.

Eisenhüttenstadt is the opposite of Berlin's Prenzlauer Berg, but its predicament is shared by hundreds of similar towns and communities in the former Communist East. The town is literally dying on its feet. Before the fall of the Wall, Eisenhüttenstadt was home to a population of close on 60,000. Today, the number has fallen to nearly half that figure and is still falling year by year. An unemployment rate of around 20 per cent has meant that the town's young people have simply upped sticks and gone west in search of work.

Steffi Schultz now survives on a state pension. Under Communism she had a job in a waste-recycling factory which she says she enjoyed, but she was made redundant not long after unification. Fields of flattened weed-choked rubble have taken the place of the Communist-era flats that surrounded her tower block a few years ago. A few concrete table-tennis tables stand in a deserted playground – but the children that used to play on them have long since disappeared. Like many of the other remaining residents in her street, Steffi Schulz is not convinced that Germany's reunification has amounted to much. "In the old days there was a real community round here," she said. "But if it goes on like this there will be nothing but pensioners left in the east," she added.

Eisenhüttenstadt's fall from grace could hardly have been steeper. It was dubbed "East Germany's First Socialist City" in 1950, when it was built from nothing by Communist "Heroes of Labour" to house the workforce and families of a giant steelworks. "Stalin City" was the name bestowed on the town in honour of the Soviet leader. Some 13,000 people worked at the steelworks during its peak years, when it supplied much of the Eastern Bloc. Today, a mere 2,700 are still employed by the works, which is now owned by the ArcelorMittal group. However, the economic crisis means that most of those have been on short-time since last year. The management is due to decide later this summer whether the steelwork's main oven should be shut down – a decision which could seal the foundry's fate for good.

Vast swathes of the former East Germany have turned into a Teutonic Mezzogiorno – the term used to describe Italy's impoverished south – and it has suffered from chronic unemployment almost since the day the Berlin Wall fell. Hundreds of factories and state-run collective farms were simply shut down after German reunification in 1990. The unemployed either went west or were given low-paid token employment under state-funded job-creation schemes which managed to hide a real jobless figure of around 60 per cent. One of the chief reasons cited for the economic failure that still blights much of Germany's east was Helmut Kohl's decision to bow to massive popular pressure and give the east Germans the Deutschmark at a one-to-one conversion rate. The move made east-German exports 400 per cent more expensive, destroying the region's economic base at a stroke. The dilemma was exacerbated by the government's Treuhand agency, which was given the job of privatising all of east Germany's state-owned industry. The upshot was a mass sell-off of east-German business to the west, which in many cases simply meant mass closures. West Germany's powerful trade unions, which took over in the east after the Wall fell, compounded the problem by insisting that their fellow workers in the east obtain equal pay.

Of course, east Germany is not without its success stories. In the south of the country, Leipzig and Dresden have emerged like phoenixes since the fall of the Wall. They have become thriving regional centres in their own right. The same can be said of many of the towns and former Hanseatic cities on east-Germany's Baltic coast. Many have been carefully restored after the years of neglect they suffered under Communism and now benefit from an expanding tourist trade. For the east too, the economic crisis has been less severe than in the west of Germany because its industry is not so dependent on exports. But a drive through the east-German countryside on back roads soon reveals the scale of the problem: in village after village, where the streets are cobbled or sometimes made of sand as they were before the Great War, there is often no one to be seen. Their inhabitants have either gone west, or are jobless, poor and glued to the television. Nearly two million have fled the region in search of jobs since the fall of the Wall and current projections show that at least the same amount again will leave over the next 20 years. It comes as little surprise that voters in the east opt increasingly for Germany's far-right, neo-Nazi, National Democratic Party or the successor to the former Communists' Socialist Unity Party, Die Linke or left party. The neo-Nazis have seats in two eastern states and recently gained a host of new seats on eastern borough councils.

Many east Germans appear to derive some comfort from the fact that their Chancellor, Angela Merkel, is an "Ossi", or an easterner. However, in the view of several leading experts on the east, the country's main political parties have largely failed the region. "The politicians appear to be as clueless as they were on the day the Wall fell," says Klaus-Peter Schmidt, an economic analyst. "It is as if they have learnt nothing from the errors that were made after reunification," he adds. Even Wolfgang Tiefensee, the government minister responsible for eastern Germany admits that although the gap between east and west is slowly closing, it is still much too wide.

The wall may have almost completely disappeared from Berlin, but it is in better shape than ever in Mödlareuth. The village is nicknamed "Little Berlin" and for most of the Cold War it was split in two by the heavily fortified border that ran between the two Germanys. From 1952 onwards, its 50 inhabitants could only make contact by waving at each other over a wooden fence and (subsequently) the walls, watchtowers, barbed wire and armed border guards that separated them. If the Westerners wanted to visit their Eastern neighbours on the other side of the street, they had to apply months in advance and make a detour of some 30 miles to get there.

Mödlareuth has retained all of its border fortifications and serves as a permanent reminder of what the Cold War was about. It also serves as a sort of Iron Curtain theme park, one of Germany's few museums dedicated to explaining the history of the country's division. Its chief guide is a former East German border guard.

When the Berlin Wall fell, Ingolf Hermann was an officer in a crack East German army unit that used to patrol up and down the Iron Curtain. His men had orders to shoot would-be escapers on sight and were expected to uphold the regimental maxim "Nobody shall pass", a perverse adaptation of the famous left-wing Spanish Civil War slogan "No Pasaran". He realised that something was wrong with his Kremlin-controlled world while on a Communist-sponsored trip to Moscow in the months preceding the fall of the Wall. The shock came when he asked for a beer in his hotel. "When the woman behind the bar asked me to pay in US dollars, I was stunned – this is not what I expected from the country we were supposed to think of a our model big brother," he says.

Unlike most east Germans, Ingolf did not rush to visit the west after the Wall fell. He waited a week or so because he was worried that he might be arrested by the west Germans. He then visited covertly, in his relatives' car, making sure he left his uniform at home. In the years that followed German reunification, he tried his hand at business, but had little success. Then he was given his job as chief guide at the Mödlareuth museum, because the west German official in charge thought an easterner should be involved. Now, Ingolf Hermann's working life is spent explaining the intricate history of the division he helped to sustain, to tourists and groups of schoolchildren. He does it with a degree of impartiality that perhaps only a former border guard from a system conquered by westerners is capable of. His other task is sorting out the piles of Communist-era uniforms, garages full of discarded East German military vehicles, and documents and guns that have been bequeathed to the museum for posterity. In more than one sense he is chief refuse-disposal officer for what was once acclaimed as the "First Worker and Peasant State on German soil".

Like many east Germans, who consider themselves to have been more than adequately punished for their country's 20th-century history, Ingolf is ambivalent about the Berlin Wall and Germany's division. "I often ask myself what would have happened if the West had agreed to accept Stalin's demands to keep Germany demilitarised. There would have been no Iron Curtain and we might have ended up like Austria," he says.