Regcheese...
I've always had pretty good luck with that purple cleaner that they sell. I use the Auto_zone knock-off, but Castr_l makes the "real" one. It smells like concentrated Windex, but really does a good job. Simple Green seems to work well too and is more environmentally friendly from what I hear.
I put the engine on a stand, wheel it out to my driveway, spray on the stuff and go to work while it soaks... I get a putty knife and parts-cleaning brushes and scrub it all down. They say to dillute the stuff, but I use it full strength.
When that's all done, I put a large plastic tub underneath it, and turn the hose on it. Remember to plug all ports and tape bags over open holes in the block.
You might have to repeat a few times. This will get the block to "used" clean condition. You'd probably have to tank the block to get it clean enough to expect paint to stick. Do NOT paint the head. The paint won't stick so well and when it flakes off, it doesn't look so good.
One word of caution... the purple stuff WILL damage some aluminum parts if it's left on long enough (longer than a few minutes). I've never had a problem with VW alu heads, but it will corrode some cad-plated and other coated surfaces.