This paper studies the aggregate implications of the geography of financial frictions faced by firms in Europe. Using proprietary data from the European Central Bank's Survey on the Access to Finance of Enterprises, we document substantial regional heterogeneity in the access to external finance, which is persistent over time and matters for monetary policy: high-friction countries are less responsive to monetary shocks. We formalize these findings in a tractable New Keynesian model of a monetary union with 22 countries that are heterogeneous in financial frictions (loan recovery rate), productivity, and size. High-friction countries respond less to monetary shocks because firms face a steeper marginal cost curve and a lower capital elasticity. This result is robust to firm heterogeneity with endogenous default, liquidity constraints, and capital mobility. Financial frictions shape the output-inflation trade-off across space: in high-friction countries the same output gain costs more inflation. Convergence experiments show that financial integration in the spirit of a European Savings and Investments Union trades off monetary policy against financial stability.