Financial market imperfections are a key determinant of the large differences in aggregate productivity across countries. This study leverages a novel methodology proposed by Whited and Zhou (2021) to measure the allocative efficiency of financial liabilities across firms and applies it to a database of 25 European countries. It finds a strong negative correlation between finance misallocation and economic development, with the productivity gains from achieving the efficient allocation ranging between 40% and 80%. Inspecting the distribution of financing costs, the paper shows these to be lower at older and larger firms than younger and smaller ones. The paper also quantifies the association between financial misallocation and real-input allocative inefficiency. It finds that a decrease in finance misallocation from the median to the 25th percentile of the cross-industry distribution increases aggregate productivity by 7.1% on average and by 8.2% in industries with high external finance dependence.