I'm going to confuse things a little more.
The GTI (UK model) has automatic climate control. It's designed to work like this:
If you press 'auto' and set the desired temperature, the smurf inside your dashboard will switch on the air-con system if it thinks it needs it and directs the airflow around the cabin as it sees fit. There are sensors in the cabin to monitor interior temperature. If the temperature and humidity dictate, then air-con smurf may decide not to bring in the air-con (although, as far as I can tell, this is rare). It will turn fan speed up and down to heat or cool the cabin temperature as quickly as possible.
Econ is one of the ways to override the automatic climate control and as others have already said, it stops the air-con compressor from kicking in. Everything else will still work, but you may never chill the car to the desired temperature on a hot day by using ambient air. Windscreen de-mist and the directional buttons are other over-rides. You can speed up the chilling of a car by using the recirculating button, which works by sending the air you've already chilled back round again and again. Don't leave this feature on for too long - the lack of fresh air may make you drowsy. A bit like reading to the bottom of this reply, I guess.
I think you are bang on m8... Although I think it will only stay in recirc for a set time...
Is it possible that the control panel has been changed to the later type but someone has fitted the older type knob that has Econ on it instead of AC ...
I think a little experimentation is in order (just to clarify, with the control unit...
). I thought if you swap out the panel for an A/C one you had to swap some other stuff too...? I dunno.
I will see if I can get it to blow truly cold air on the way home this evening, if not I will have to go for an AirCon service
Expensive!