By Luiza Ilie
BUCHAREST, April 19 (Reuters) - Romania's economy will lead growth among the European Union's 10 emerging eastern states next year as its public finances improve and domestic demand recovers, the World Bank said on Tuesday.
In a report, the World Bank said growth in the bloc's 10 ex-communist states would rise by 1 percentage point on the year to 3.1 percent in 2011, and reach 3.8 percent next year, narrowing the gap to its western economies.
However, risks to growth were notable across the region, stemming from weak government and private investment and feeble consumption, dragged down by low household income, higher unemployment and tight lending, the report said.
The Bank said Slovakia and Poland -- where consumption levels are already strong -- would benefit from low imbalances before the financial crisis and good EU fund absorption.
Estonia, Lithuania and Latvia would benefit from better exports, while demand in their domestic markets slowly builds.
Growth in the Czech Republic and Hungary would advance at a slower pace as their economies are already more developed.
Meanwhile, Romania and Bulgaria -- the EU's two poorest states, which were hit later but harder by the financial crisis -- would grow slightly faster than their neighbours in 2012.
Romania, which suffered two years of deep recession as it struggled to hold on to a 20 billion euro aid package led by the International Monetary Fund, will post growth of 1.5 percent in 2011 and 4.4 percent next year, the Bank said.
SUPPORTIVE MONETARY POLICY
The report also said it expected monetary policy to remain growth-supportive across the region, despite continued pressure on inflation from surging global food and energy prices.
"Monetary policy is set to remain accommodative for the recovery, although policy rates could increase from low levels at a moderate pace," the Bank said.
Eastern European economies would also get a shot in the arm from the May opening of German and Austrian labour markets to all but Romania and Bulgaria, which joined the EU later.
Up to 140,000 workers, mostly Polish, are expected to migrate to Germany each year, getting jobs mostly in hotels and restaurants. Cash sent home by eastern European migrants working abroad has been an important growth factor for years. [ID:nLDE72S0PL]
The report also said the 10 states needed to ensure their largely foreign-owned banking systems remained stable, and to continue fiscal tightening.
It said banks' funding pressures persisted. While non-performing loans had peaked in Latvia, they were still at more than 18 percent of the overall loan portfolio, with Romania a close second.
(Editing by John Stonestreet)