Recently in numerous European countries of immigration, there has been a widespread 'moral panic' about immigrants and ethnic diversity. In the Netherlands, a backlash has occurred in policy and in public discourse, with migrants being blamed for not meeting their responsibility to integrate and for practicing 'backward religions'. Why is it that a self-defined 'liberal' and 'tolerant' society demands conformity, compulsion and introduces seemingly undemocratic sanctions towards immigrants? These issues are analysed by providing an overview of modes of incorporation of immigrants in the Netherlands and it presents evidence on the socio-economic situation of immigrants. The paper argues that patterns of disadvantage, especially those which affect Dutch-born minority youth, cannot be explained by the low human capital attributes of the original immigrants. The causes have to be sought in pervasive institutional discrimination and the persistence of a culture of racism. The paper argues that racial discrimination is the link between immigrant structural marginalisation and the 'tolerant' society.