A prerequisite for an optimum currency area are limited divergent developments. In this paper, we assess analytically whether an international transfer mechanism can enhance consumption risk sharing and efficiency of the international division of production in a monetary union. We also derive quantitative results for a potential European unemployment benefit scheme (EUBS). A EUBS can provide risk sharing by stabilizing relative consumption and unemployment differentials. Following supply and government-spending shocks, however, a EUBS would additionally reduce allocative efficiency. The welfare effects of a EUBS hence depend on the underlying cause for cross-country differentials. A EUBS that is only active after specific shocks would maximize overall welfare. Even without such a selective activation, a EUBS would raise welfare in European Core countries in the quantitative model, leaving welfare in the Periphery almost unchanged. During the euro crisis, the Periphery would have benefited from substantial transfers from the Core. •We study effects of international transfers on allocative efficiency and risk sharing.•Direction of optimal transfers depends on shock type, home bias and price rigidities.•After supply and fiscal shocks, optimal transfers might flow out of recession country.•A European unemployment insurance would reduce welfare after these shocks.•Overall, the EMU would gain from such an insurance according to quantitative model.