Despite the strong reviews for the new Golf, VW earnings were hit hard by problems in Europe.

The ongoing collapse of the European automotive market took a heavy toll on the world’s third-largest automaker by unit sales, Volkswagen AG reporting a 38% decline in first-quarter profits.

The maker previously had been able to offset the worst of the European downturn by counting on strong demand in other key markets, especially China. But the results of the first quarter shows it is being caught up in the same net that is expected to hammer earnings for essentially all manufacturers operating on the Continent – including Ford and Daimler, both of whom also reported earnings today.

Europe’s biggest automaker said it earned 1.95 billion euros, or $3.15 billion, for the January-March quarter, down from 3.15 billion euros a year ago. Revenue, meanwhile fell 1.6 percent, to 46.57 billion, due to what VW called “negative effects from declining European markets.”

“As expected, business in the first quarter was dominated by the difficult economic environment. The markets were sluggish, especially in Europe, and not least in Germany. But we remain confident overall that we can pick up speed over the rest of the year,” said Martin Winterkorn, Chairman of the Board of Management of Volkswagen AG, in a prepared statement. “Despite all the economic uncertainties, the Volkswagen Group is standing by its goals for 2013.”

The maker’s pre-tax profit  suffered an even bigger decline, plunging from 4.2 billion euros a year ago to just 2.7 billion for the latest quarter.

The latest quarterly figures are not a complete apples-to-apples comparison, however, as they reflect the mid-2012 completion of Volkswagen AG’s acquisition of Stuttgart-based sports carmaker Porsche.

Considering the fact that European sales have plunged to a two-decade low, VW described its overall performance for the first quarter as “satisfactory.”

(Ford’s strong Q1 earnings nonetheless hammered by problems in Europe. Click Here for more.)

Until recently, Volkswagen had seemed able to largely overlook the problems happening around it as the home market tumbled. It continued to somewhat offset Europe’s dire situation with sales and revenue from other key markets such as North America, where it last month reported its best sales in four decades.

China, in particular, has been an engine of growth for the maker, where it has been locked in a battle for dominance with rival General Motors.

For the quarter, worldwide VWAG sales came in at 2.27 million, a gain of 4.8% year-over-year – though about 90,000 behind GM and 60,000 short of Toyota which finished the January – March period as the world’s best-selling automaker.

VW’s revenues, however, Slipped 1.6%, to 46.6 billion euros.

Looking forward, VW officials said the company is bracing itself for “increasingly stiff competition in a challenging market environment.”