Given that the new instance wants to access the application on the existing compute engine instance, these applications seem to be related so they should be within the same VPC. It is possible to have them in different VPCs and peer the VPCs but this is a lot of additional work and we can simplify this by choosing the option below (which is the answer)
1. Create a subnet in the same VPC, in europe-west1.
2. Create the new instance in the new subnet and use the first instance subnets private address as the endpoint. is the right answer.
We can create another subnet in the same VPC and this subnet is located in europe-west1. We can then spin up a new instance in this subnet. We also have to set up a firewall rule to allow communication between the two subnets. All instances in the two subnets with the same VPC can communicate through the internal IP Address Ref: https://cloud.google.com/vpc