I'd try bleeding the system and making sure all sliding surfaces where the pads move are spotlessly clean with a dab of ceramic grease on them. Also all slider pins are clean and free.
Bleeding this generation of VW can be tricky but I've transformed a few VW's of this era mainly by simply bleeding the brakes.
Brake Master Cylinder
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Re: Brake Master Cylinder
Bog standard B5.5 Highline Estate TDI