I have had similar problems with Jettas (which use basically the same coolant
level sender) and my '85 Vanagon.  When that light is flashing and the temp is
normal then it is supposed to be telling you that your water level is low.  If
it is not low (double check this first) then it could be that your sender in
the water tank is bad.  They sometimes go bad around the two rods that stick
down in the tank.  Coolant comes up the rods and seeps into the area where the
plug, plugs into the top of the tank.  Now the coolant sensor goes haywire and
the light blinks when it is not supposed to.  Just unplug the sender and look
at where the two prongs are on the top of the tank.  If there is wetness in
there then this is your problem.  The wetness up there could also be caused by
hairline cracks in the expansion tank around where the sender screws in.  This
is a common problem with these tanks.
Let me know what you find.
Ken Wilford
Van-Again
John 3:16