I once towed a big box trailer (twin axle) from Nottingham to Brighton and back, with my old Mk2 1.8GL, and that was fine, bit it wasn't heavily loaded. Managed to get up to 70 with a push, although technically with a trailer you're restricted to 60.
The main issues with towing are firstly power, and then secondly the weight of the towing car. If your car isn't heavy enough, the weight of the trailer/caravan/etc will tip the car up and stop you getting grip, which is why 4wd cars are popular for towing, cos you can get more grip.
With a Mk2, you'd be able to tow a small caravan or maybe a trailer with a car the size of a mini on it, but a 205 might be too heavy on the trailer.
I know you won't like it, but go to the newsagent, and pick up one of the caravan magazines and look at one of their car reviews, that'll give you a good idea of what makes a good towing car.
Generally estates are better aerodynamically for towing, the towing car needs to be a certain amount heavier than your load.
A twin axle flatbed trailer will be better for towing because the weight will spread over the 4 wheels rather than pushing down on the back of the towing car.
If you still want to tow with your Mk2, get a tow bar fitted (mine cost about £100 for the bog standard one), the go to a trailer place and rent one to see how it copes before you go out and buy an expensive trailer for the car.
If you're going to go for a bigger VW, try a Passat.
hth