G20 summit to test EU debt deal

French President Nicolas Sarkozy, who's hosting the G20 summint in Canne, at a G20 meeting of agriculture ministers in June.

NEW YORK (CNNMoney) -- The world's most powerful political leaders will gather this week in France to chart a course for the global economy as the outlook for growth remains fraught with risks.

The two-day Group of 20 summit kicks off Thursday in Cannes, with Europe's sovereign debt and banking crisis expected to dominate behind-the-scenes talks.

After much political wrangling, European Union leaders managed to finally put together a deal last week to contain the debt crisis in Greece, strengthen bank balance sheets and prevent the spread of contagion to larger euro area nations.

But key details and questions remain. In particular, the Europeans need to convince China and other emerging economic powers to back the bailout fund for debt-laden Euro nations.

French President Nicolas Sarkozy, who plays host to this year's G20 summit, has already approached Beijing about investing in the European Financial Stability facility through a so-called special investment vehicle.

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Italy, which has come under attack because of its unsustainable debt load, will also be under pressure to demonstrate its commitment to economic and fiscal reforms.

Europe's debt crisis continues to be one of the biggest risks to global economic growth, according to the Organization for Economic Cooperation and Development.

"The measures identified by the EU leaders go in the right direction," the OECD said in a report issued Monday. "However, more detailed information is needed."

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The group forecast economic growth of only 3.9% for the G20 nations this year, down from 5.2% in 2010.

The forecast for the eurozone is worse. While the OECD predicts a modest 1.6% growth this year, the group forecasts growth of just 0.3% for 2012, down from its prior estimate of 2%.

Other big challenges face developed G20 nations such as the United States, which must boost economic activity in the short run while also taking steps to bring down long-term budget deficits.

In Cannes, President Obama will continue to promote his latest job creation bill and plans to "substantially reduce" government spending, according to a senior White House official.

There have been calls to renew the sense of "common purpose" that leaders displayed in 2009 at the G20 summit in London. At that time, the global financial system was in crisis and the economy was in a deep slump.

In response, the G20 agreed to unleash $5 trillion to stimulate the economy and pump billions into the IMF to strengthen the financial system.

They agreed to new rules against risky bets in financial markets, plans to boost hiring and steps to ensure a balanced global recovery. "Because of the coordinated action the G20 took then, the global economy began to grow again," Obama wrote Friday in an FT op-ed.

What a difference two years makes. Since then, the stimulus has ended and the focus has shifted to balancing budgets and paying down debt.

At their summit last year in Toronto, the G20 pledged to cut deficits in half by 2013.

IMF director Christine Lagarde told G20 finance ministers in September that the global economy "has entered a dangerous new phase."

The official talking points at this year's summit will center on things like "restoring growth" and "managing global imbalances." For advanced economies, this means doing something about unemployment, while also promising to balance budgets and reduce debt.

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There will also be calls for China and other developing nations with big surpluses to boost domestic consumption and do trade deals to help their developed partners avoid recession.

In emerging economies, where growth remains comparatively robust, policy makers have been tightening the flow of credit to cool inflation and prevent a hard landing.

The G20 is also expected to make a commitment to reform the "international monetary system."

In general, this refers to capital flows and currency exchange rate policies. While China has loosened its peg on the yuan somewhat, the United States wants Beijing to have a real "market-driven" exchange rate.

The G20 leaders will outline the progress they have made to reform the global financial system, including sweeping changes from the Dodd-Frank Act. But leaders will probably say that more needs to be done.

The Europeans, who just agreed on new capital requirements for banks, have also been pushing for a financial transaction tax that would apply to things like stock trades and transactions in the currency market.

"Wasn't the financial sector the main cause of the 2008 crisis?" Sarkozy asked in a recent speech. "The financial sector should therefore be the primary contributor to the refounding of the global economy and its future development."

The financial transaction tax is similar, albeit smaller, to the so-called Robin Hood Tax, which is being promoted by a group affiliated with the Occupy Wall Street movement. Expect Robin Hood-related protests leading up to the G20.

The G20 consists of large, industrialized economies such as the United States, Germany, France, Italy, Japan, the United Kingdom and Canada. It also includes emerging economic powers China, India, Brazil and Russia.