I know VWs are not exactly reliable cars, economical, or great cars. I agree that the 1.8T is sludge prone and 2.0L is underpowered plus may consume oil. Although I drive a Jetta with a 2.0L and like the feel of the car, I generally don't recommend VWs.
But if you really like the car I would go for the 2.0L engine. As for years the Mk3s (93-99) is said to be better than the Mk4s (99-05). Haven't heard about any oil consumption problems on the Mk3s. But I think the oil consupmtion problem for the Mk4s were fixed after 02 or so. Also I would get the 5 speed stick shift, VW automatics aren't exactly great either.
I would recommend alternatives such as Toyota Corolla, Honda Civic, Chevy Cobalt, Ford Focus, Dodge Neon.