Leoncio Fernández Ramos is much in demand. "Please make this quick," he says through a translator. "I don't have much time." A film crew from Czech TV is waiting for him; a satellite TV van of unknown provenance is lurking too. The Spanish-Gibraltar standoff has gone global, and Ramos, the 67-year-old president of the fishing federation of La Línea and San Roque, is at the centre of the row.

I have tracked him down, after a three-hour pursuit, to a pier in La Línea, the impoverished little Spanish town on the other side of the Gibraltarian border. Boys swim in the clear waters; a fisherman is painting his boat; the view across to the Rock is lovely now the morning mist has cleared, leaving only a halo of cloud round the top. It is a beautiful setting for a bitter war of words.

The immediate cause of the battle between Gibraltar and Spain is the artificial reef that the British colony has lain around the Rock. Ramos says it is disrupting fishing in waters where Spanish boats have fished for generations. "It was done to cause us problems," he says, dismissing the Gibraltarian view that the reef – made from concrete blocks – is designed to help replenish fish stocks. "It exists only to stop us fishing." The Gibraltarians say they are their waters and they can do what they like, but Ramos cites custom and practice. "We've fished there for hundreds of years."

What began as a fight over fish has, through the dog days of summer, turned into something more significant – a struggle for the soul of Gibraltar. Spain's strident foreign minister, José Manuel García-Margallo, has declared "the party's over" as far as Gibraltar is concerned. Spanish border checks have been stepped up, leading to long queues for drivers at the frontier – pedestrians, subject to only the most cursory of bag searches, are so far unaffected. The Spanish have also raised the possibility of a €50 crossing fee and the closure of Spanish air space to flights bound for Gibraltar. The British response has been threefold. The foreign office has expressed concern; Boris Johnson, in his role as newspaper pundit, has demanded Spain take its "hands off the rock"; and the Royal Navy, in the spirit of Lord Palmerston, has sent a gunboat – the frigate HMS Westminster, which docked in Gibraltar a few hours ahead of me.

Motorists queue to cross the border between Spain and Gibraltar, 15 August. Photograph: Marcos Moreno

It was quite like old times when I arrived. The crew of the Westminster and its auxiliary vessels were already ashore and swaying drunkenly outside the pubs in Casemates Square, the booze-and-burger hub of Gibraltarian nightlife. Stepping into a pool of vomit within half an hour of arriving was my unfortunate initiation into the Gibraltar imbroglio, but as the booze continued to flow beyond 2am the message to the Spanish foreign minister was clear: the party is most definitely not over.

Next morning, on the crowded, vomit-free street in the centre of town, Gibraltar-born septuagenarian Joe Brugada and his wife were making the same point. They had set up a stand outside the parliament building and were selling a CD called Stand Firm for £5 a pop. Brugada had written the lyrics, set to the tune of his old school song, and it had been recorded by the band of the Royal Gibraltar Regiment.

"Stand, stand firm Gibraltarians,/Firm as the Rock that guards the sea./To God and our Queen, and traditions of our land,/Stand ever steadfast in love and loyalty." Brugada plays it loudly over and over until his wife suggests he give it a rest for the sake of the customers in the adjacent cafe. Why is he making this very public statement? "It's a song for Gibraltar, rallying them against the aggression from Spain," he tells me. "This is the worst crisis since Spain closed the frontier [in 1969]. They've hit us from all sides. This has never happened before. It's usually been concentrated on the frontier."

"Do you know Simon Jenkins?" he suddenly asks me. Brugada had been incensed by an article Jenkins had written in the Guardian last week dismissing Gibraltar and the Falklands as "relics of empire". "The British empire had much to be said for it, but it is over – dead, deceased, struck off, no more," Jenkins had written. "The idea of a British warship supposedly menacing Spain is ludicrous. Is it meant to bomb Cadiz? Will its guns lift a rush-hour tailback in a colony that most Britons regard as awash with tax dodgers, drug dealers and rightwing whingers?" Jenkins was not standing firm.

Bien-pensants back in the UK may want Gibraltar to be shared with Spain, or better still handed over lock, stock and barrel, but it is hard to see it happening any time soon. "We're not interested in discussing sovereignty," says Brugada. "If you think of the days that led up to the closure of the frontier and the [Spanish] state [that existed under Franco], and the so-called democratic government of today and what they have been doing to us every other year when it suits them to raise the temperature at the border in pursuance of their sovereignty claim, how could we ever want to be under that regime which does not even respect its own people? No one with two ounces of common sense could enter into that discussion."

Joe Brugada selling his CD Stand Firm. Photograph: Richard Atkins/Solarpix

Brugada speaks for traditional Gibraltar, even though he complains that his fellow citizens are proving reluctant to fork out a fiver for his stirring anthem. Further down Main Street a dog has been decked out in a union flag bandana and sunglasses, and on the Glacis estate close to the border – the heart of the working-class part of Gibraltar – even more British and Gibraltarian flags than usual are draped from windows alongside the washing. There is, though, another, more shadowy Gibraltar, centred on the million-pound flats that have been built on reclaimed land in the lee of the Rock. You won't see any flags fluttering from those expensive executive dwellings, and it seems unlikely that these wealthy, geographically mobile financiers give two hoots about which country claims ownership of Gibraltar as long as its offshore tax advantages are protected. Their attachment to "Gib" is a matter of pocket, not heart.

I first visited the colony in 2002, when the Blair government's intention to do a deal with Spain on joint sovereignty was causing uproar on the Rock – it was eventually thwarted by Spain's refusal to forgo its long-term claim for complete control. I returned last year and was surprised at how much plush new housing had been built. As the navy reduced its presence and financial services and offshore betting moved in to fill the gap, what had been a rough-and-ready garrison town had become a player in the casino capitalist game. The centre of Gibraltar, with its bobbies on the beat, fish and chip shops, red telephone boxes and old-fashioned pubs, may resemble Great Yarmouth circa 1964, but around the new marinas they fancy themselves as the next Monaco, and these New Gibraltarians might prove less recalcitrant than Brugada, the patriotic dog-owner and the residents, many of them ex-military, on the Glacis estate.

I find Gibraltar claustrophobic. How many times can you shuffle up and down Main Street, past Peacocks, Marks & Spencer, Topshop, Clarks and all the stores selling cute miniature Barbary apes, without going mad? Some Gibraltarians like to talk about the diversity of society on the Rock – a well-established Jewish community, Muslims from north Africa, a new influx of Asian shopkeepers and traders – but they remain buried beneath the cult of Britishness. I played in a week-long chess tournament on the Rock in January, but chose to stay in La Línea and commute, in part because the hotels and restaurants are a lot cheaper but also because it's less odd, less self-absorbed than Gib, this strange amalgam that prides itself on being "more British than the British", yet is in many respects so Spanish.

Take the language. Native Gibraltarians are bilingual, and one of them tells me that, while his working language is English, Spanish is his "emotional" language. It seems symptomatic of the contradictions that in the little shop on the Glacis estate, the two people serving behind the counter, presumably residents of La Línea, speak no English. This bastion of Britishness depends on the 7,000 workers who cross the border every day to keep it running, and, as the critics of the Spanish government are quick to point out, it is those cross-border commuters who are principally being inconvenienced by the go-slow at the frontier.

If Gibraltar is claustrophobic now, it must have been unimaginably so in the 16 years from 1969 to 1985 that the frontier was closed. In 2002, I met a Gibraltarian man whose grandmother lived 10 minutes away in La Línea – a round trip that, when the border was closed, used to take him 12 hours, with a ferry across the Straits of Gibraltar to Tangier, another boat to Algeciras in Spain and then a bus to La Línea. No wonder animosities – directed at Spain's government rather than its people – are so entrenched.

Gibraltarians welcome HMS Westminster into the harbour. Photograph: Ben Birchall

Yet some Gibraltarians look back fondly on those days. "Things were laid back when the border was closed," says Eric Shaw, who served as a soldier on the Rock in the 1960s and has lived here for 40 years. "People partied. We've got beaches, wonderful weather, we had a nice time. Everything came in by boat or by aeroplane, and it was a hell of a holiday. There was live music somewhere in town each night, every night." Now all they have is Julian Lennon's Beatles memorabilia exhibition (John and Yoko got married there in 1969) and a curious obsession with Miss World. Local woman Kaiane Aldorino won the competition in 2009 and a large poster illustrated by her photograph and proclaiming Gibraltar as the "Home of Miss World 2009" is the first thing you see as you pass through customs. Somehow it makes more of an impact than the big stone and bronze memorial emblazoned with "Gibraltar – Cradle of History" that you pass as you start to cross the runway on to the Rock. Having to walk or drive across the airport's runway – "Pedestrians are to keep within the white lines. Please cross quickly," says a sign, though the occasional tourist does stop for a photograph –is one of the more endearing quirks of life on Gibraltar.

The traditionalists are convinced that in Gib, a little bit of old England under a Mediterranean sun, they have created a heaven on earth. "Life is wonderful here," says Brugada. "It's a little paradise. That's what irks the Spaniards. Every time they see a cruise ship come in, they must have a stroke." He says that, by contrast, life across the border is much tougher. "La Línea has 40% unemployment, despite the fact that so many of the people who live there find jobs in Gibraltar."

Shaw uses almost exactly the same terms to describe Gibraltar. "This is Shangri-La and has been for an awful long time. It's changing, but you can't stop things from changing. I wish one could. We're being dragged kicking and screaming into the 21st century, and we don't really want to be there." Like Brugada, he also believes the Gibraltarian and Spanish political traditions can never find common ground. "In Spain the dons at the top really, truly do believe they're dons. You don't have citizens in Spain, you have subjects. The difference is that citizens have a say and subjects do as they're told." Shaw is 67 – the same age as Ramos, the head of La Línea's fishermen – and it may be that the generation that came of age in the Franco era will never see eye to eye.

Shaw has a peculiar dual role. He runs the nature reserve at the top of the Rock that looks after the apes, but is also a marine biologist – it was a logical progression from his career as a diver in the army – and is the man who admits to starting the great artificial-reef controversy. The recent dropping of concrete blocks that has so annoyed the Spanish is only the latest phase of a programme that has been running for 30 years to create reefs around Gibraltar to replenish fish stocks and encourage biodiversity. He cites the fact that the Spanish are only now making a fuss as evidence that it has been dredged up as an excuse for a political row designed to divert attention from Spain's domestic problems. "It's an attempt to misdirect the Spanish population and make them forget what everyone really wants to talk about [the state of the economy]," he argues. "It's not really the Gibraltarians' fault. The Spanish government is flim-flamming its own people."

Back in La Línea, Ramos is by no means an uncritical supporter of the way the Spanish government is dealing with the crisis. "They have been playing with us as well," he says. "The stone used for Gibraltar's reef came from Spain. They have been selling arrows to the Indians." He says he is not interested in playing politics and doesn't care whether the Rock is British or Spanish. He just wants to carry on fishing. "The tragedy is that we are all related," he says. "The Gibraltarians are family. I've got cousins there." The cemetery on the Rock is filled equally by the standard-issue military graves of British service personnel and more elaborate constructions with Spanish names and photographs of the deceased – two traditions united in death.

There have been reports of attacks on Gibraltar-registered cars in La Línea, but no one I speak to in the town seems unduly exercised by the abstract issue of sovereignty. They just want an accommodation that is fair to both sides.

Shaw doesn't believe the Spanish government even want the Rock. "What would they do with it? There are 30,000 of us here. We'd be a ghost town in 30 days if the Spanish took over. All the commerce would disappear overnight." He reckons the Spanish wouldn't be allowed to keep it offshore because the EU would deem Gib to be an integral part of Spain rather than an overseas dependency with its own rules. The Rock may be an anachronism, but that's the only basis on which it can function. "We'd be of no use to the Spanish," he says. "We can't grow anything here. We don't produce anything here." They don't even fish any more, despite being surrounded by the sea, which is why the Spaniards were able to fish in their waters undisturbed for so long. Without offshore commerce, they would be nothing: a Rock without a role.

For the moment, the great summer of discontent is keeping everyone happy. The government in Madrid has its useful diversion; the Gibraltarians can do what they love doing – fly their flags, embrace the navy and revert to the siege mentality that has always defined them; global media organisations have a quirky tale; Boris Johnson some instant copy. Shaw is amused by the way it has become a global story, and just hopes artificial reefs get some positive publicity out of it. The only people suffering are the Spaniards in the traffic queue. As dusk falls, it snakes along the coastal road that runs around the east of the Rock. "Normally, it would take half an hour to get across," says Ana Fernandez, who has spent the day on Gib with her boyfriend looking at the apes. "Today, it is going to take us two or three hours. It's annoying." Yet as she says it, she laughs. That's usually the best way to respond to Gibraltar.