GERMANY must make greater efforts to cut its public sector deficit to the Maastricht treaty criteria by 1997, the Bundesbank has warned.

In its latest monthly report, the central bank said German financial policy faced "great challenges" if the deficit was to be brought below the Maastricht limit of 3 per cent of Gross Domestic Product. The deficit was 3.6 per cent last year.

The Bundesbank report said: "In view of recent developments, the necessary medium term (budgetary) consolidation requires still greater efforts than previously assumed."

It called for a double strategy of cutting the deficit while reducing the burden of taxes and social security levies.

It warned that "the already heavy pressure to reduce public spending will increase" if these goals are to be achieved.

The combined deficit of Germany's federal, state and local authorities was worse than expected, last year, the report added.

Nor was there any discernible improvement in the finances of Germany's pension, unemployment and health insurance funds despite a big rise in contribution rates.

Earlier this week the Bundesbank president, Dr Hans Tietmeyer, said it might he better to delay monetary union than to go ahead as planned in 1999 without an adequate degree of economic convergence among member states.

While his remarks in many ways reflected the Bundesbank's long standing position on EMU, the explicit reference to delay was seen by some as a clear admission of the problems ahead.

"I think the more comments there are like these, the more it shows the difficult questions which really need to be answered," said one EU diplomat.

Dr Tietmeyer's remarks follow a series of comments casting doubt on the feasibility of EMU starting in 1999.

Increasingly, the issue has become a political weapon for opponents who say the monetary project is at the root of Europe's mounting economic problems.

Indeed, there is growing concern among some diplomats that EMU might have a destabilising effect, fracturing Europe along economic and social lines.