This paper studies aggregate implications of the geography of financial frictions in Europe. Using proprietary data from the European Central Bank's Survey on the Access to Finance of Enterprises (SAFE), we document three new facts. First, there is substantial cross-country heterogeneity in the access to external finance. Second, this heterogeneity is persistent across time and cannot be explained by sectoral composition or firm size. Third, European countries that are less financially constrained are more responsive to identified ECB monetary policy shocks. To rationalize these empirical results, we develop and calibrate a tractable New Keynesian model of a monetary union with 26 countries and regional differences in financial frictions. High-risk countries are less responsive to monetary shocks because their firms face a steeper marginal cost curve and a lower marginal propensity to invest. Convergence experiments show that continuous financial market integration raises the power of monetary policy, but at a potential cost to financial stability.