The urgency of measures to transform Britain's cities is underlined by the latest report which highlights the extent to which the North-South divide is prospering in this country.

Connecting England, a study commissioned by campaigning group the Town and Country Planning Association, calls for "joined-up" government action to ensure the whole country benefits from economic success, with particular regard to transport.

However, it must be remembered that European money has played a key role in regeneration and economic development in Britain over the last 20 years. In Yorkshire, places like Leeds, Sheffield, Bradford and Barnsley have benefited from EU investment – which has helped to transform city centres, improve transport networks and revitalise local communities.

A wide range of voluntary organisations has used EU support to deliver training and employment opportunities to people in deprived areas. Trams and railway links have been upgraded, linking people to jobs, and cities to each other. So the announcement of a new EU budget in Brussels is important news for Britain's cities and towns, especially if the North-South divide is to diminish. It will not be straightforward. The biggest challenge – delivering economic growth with a shrinking share of EU cash – still lies ahead.

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 is still a substantial amount of money – 9.4bn euros – flowing to the UK from Brussels over the next seven years. In a period when the growth of domestic public spending is likely to recede, these EU funds will need to be spent carefully.

Back in London, the Department of Trade and Industry is now consulting on a draft National Strategic Reference Framework (NSRF), which will serve as a blueprint for the Structural Funds across the UK.

A quick read of this document shows that a number of critical issues are still up for debate. Take Yorkshire as an example. It is not yet clear how much funding will be available to the region. Similarly, there are uncertainties around how Yorkshire's EU money will be prioritised and delivered.

Over the next few months, the Government needs to sharpen its strategy for the EU Structural Funds. Limited resources only go so far – and can accomplish very little if they are spread thinly across the UK. Giving every town and village in Yorkshire a bit of cash won't help to make the region's economy more dynamic. But focusing European resources on a few key projects just might.

It's also unclear how EU funding will relate to the UK Government's own regional spending from 2007 onward. The Government's draft strategy aspires to link up European and domestic resources, but this is easier said than done. The fast-changing architecture of regional and local government finance has many potential beneficiaries confused. And it's impossible to discount the centralising tendencies of Whitehall departments, which often have their own ideas on how the Structural Funds should be spent.

Then there's the age-old question of governance. In the past, Government Offices have been responsible for Structural Funds, working closely with successful local partnerships. But there is talk of handing overall control to Regional Development Agencies, like Yorkshire Forward, which may not have the capacity to deliver EU programmes on top of their existing commitments. All this means that there are some stark choices to be made on Britain's last big allocation of EU Structural Funds. The Government has set out a basic strategy for 2007-2013 – but it's short on key details. And the DTI has avoided the most important question: where should the money be spent?

If we want to get the maximum possible "bang for our euro", we need to concentrate Structural Funding on big city-regions outside London. Leeds is an obvious example.

Why city-regions? Report after report shows that Britain's big urban areas are drivers of economic growth. Yet our big city-regions – like Leeds and Manchester – are not yet punching their weight.

Sheffield and South Yorkshire will continue to have dedicated EU funding from 2007 to 2013, given the scale of their economic challenges. But as the Government prepares to allocate the remaining resources, the Leeds city-region needs to make a strong case for continued European investment.

It needs to convince Whitehall that concentrating EU resources on places like Leeds will have a positive economic impact on Yorkshire and on UK plc. So, a city-regions focus will tackle both European and domestic priorities – and leave a lasting legacy for the EU Structural Funds across the UK.

In the coming months, we need to make hard choices, and concentrate resources on cities in order to spark wider economic growth. It's an opportunity we cannot afford to waste.