Europe had no effective safety standards
until 1998, and that took forceful intervention by the the European Parliament against the recalcitrant European automakers. North American E36s are safer thanks to the then, considerably more influential, U.S. NHTSA
[small NCAP PDF] and
U.S. regulations.
EDIT: The regulations only limit injuries to the head, neck and chest (see S6.x). They also require a dummy stay inside the car.
I suspect BMW added the knee panel after an older crash test, as part of the above, voluntary New Car Assement Program (NCAP).