The experience of the European monetary union has been characterized by current account imbalances, widening gross external positions, and a severe sovereign debt crisis. I argue that institutional features of the European Economic and Monetary Union have contributed to all three. I show in a model that subsidies on holdings of assets issued within the union contribute to current account imbalances, to gross capital flows, and to the severity of the crisis. In a quantitative model with heterogeneous countries, I show that the subsidies account for a substantial fraction of the widening of gross external positions in the euro area by inducing countries with high income and external assets to engage in intermediation of gross capital flows.