When the European Union's 2007-13 budget was finalised in Brussels last month, 25 heads of government breathed a collective sigh of relief.

But for ministers in charge of EU regional policy, the hard work has just begun. Their biggest challenge - using the structural funds to deliver economic growth - still lies ahead.

Here in the UK, structural funds have played a key role in regeneration, infrastructure improvements, and social inclusion programmes for nearly two decades. City centres from Birmingham to Glasgow have been transformed, thanks in part to European investment. A wide range of third sector organisations have used EU support to deliver training and work opportunities to people in deprived areas. Trams and railway links have been upgraded, linking people to jobs, and cities to each other.

But from 2007, the UK will need to do more with less. Britain's total structural funds package will fall by more than 40 per cent in real terms.

And the European Commission has said that the remaining funds must be used to promote its Lisbon Agenda, which focuses on growth and jobs.

There will still be a substantial amount of money - £6.5 billion - flowing to the UK from Brussels over the next seven years. But in a period when the growth of domestic public spending is likely to recede, these EU funds will need to be spent very carefully.

The Department of Trade and Industry is now consulting on the Draft National Strategic Reference Framework (NSRF), which will serve as a blueprint for structural funding across the UK. A quick read of this document shows that a number of critical issues, such as regional allocations, geographic scale and focus, are still up for debate.

First, the Government must sharpen its strategy for planning and delivering the funds. The EC demands a "focus on opportunity". The DTI, however, has said that it wants to use the structural funds to also address need.

But it is hard to see how both goals can be accomplished with the limited resources, especially if they are spread thinly across the UK.

Second, it is unclear how EU funding will relate to domestic regeneration, business support, employment and skills programmes. The NSRF aspires to link European resources to funding mechanisms such as local area agreements, which give local bodies greater spending freedoms, and the regional development agency (RDA) single pot. But this is easier said than done. The fast-changing architecture of regional and local government finance has many potential beneficiaries confused. And it is impossible to discount the centralising tendencies of Whitehall departments, which often have their own ideas on how structural funds should be spent.

Third, the NSRF is vague about the question of governance. In the past, many structural fund programmes were run by government offices and successful local partnerships. But there is talk of handing overall control to the RDAs, which may not have the capacity to deliver EU programmes on top of their existing commitments.

So there are some stark decisions to make on what is likely to be Britain's last big allocation of EU structural funds. The Government has set out a basic strategy for 2007-13, but it is short on key details. And the DTI has ducked the most important question: where should the money be spent?

The easy option - spreading resources across the UK's nations and regions - would lead to the worst possible outcome: that the funding's overall impact is minimal. If we want to get the maximum possible bang for our euro, we need to concentrate structural funding on big city regions outside London.

Why city regions? Report after report shows that Britain's big urban areas are drivers of economic growth. Yet outside the Greater South-East, our big city regions are not yet punching their weight.

Two urban areas - Merseyside and South Yorkshire - will have dedicated funding from 2007-13 (see box). Concentrating the remaining resources on promoting economic growth in Leeds, Glasgow, Newcastle, Manchester and Birmingham will help regionally and nationally. Not coincidentally, narrowing the regional economic divide remains one of the Government's most elusive policy goals.

A city-regions focus will tackle both European and domestic priorities - and leave a lasting legacy for EU structural funding in the UK. This is an opportunity that the Government cannot afford to waste.

Download Last Orders! What the new EU budget means for Britain's cities, the latest Centre for Cities discussion paper.

STRUCTURAL FUNDING: THE NUMBERS

The UK will receive £6.5 billion in the 2007-13 funding round. In real terms, this is more than 40 per cent less than in 2000-06 (£11.5 billion).

Convergence Objective: £1.8 billion

- Replaces Objective 1 funding and offers the maximum level of EU support per head.

- Cornwall, West Wales, and the Highlands and Islands are eligible.

- Merseyside and South Yorkshire no longer qualify.

Competitiveness Objective: £4.3 billion

- Replaces Objectives 2 and 3 funding and covers all other areas.

- Merseyside will get ring-fenced transitional funding of £298 million (down from £902 million in 2000-06) and South Yorkshire will get £278 million (down from £833 million).

- About £1.7 billion from the European Regional Development Fund, which targets enterprise growth and sustainable development. Delivered by regional programmes.

- Around £1.7 billion from the European Social Fund. It focuses on work opportunities and skills, and is delivered by a national programme.

Co-operation Objective: £416 million

- Replaces the Interreg initiative

- Its priorities are for cross-border projects and networks, and the exchange of best practice.