1994年12月，製訂《埃塞俄比亞聯邦民主共和國憲法》。憲法規定，埃塞在大選後將實行聯邦製和議會內閣製，任期為五年。1995年5月，埃革陣在全國大選和地方選舉中獲得壓倒性勝利，並於同年8月建立起聯邦和各級地方政府。 2000年5月，埃革陣在全國大選中再次獲勝。
In 1994, a new constitution was written that formed a bicameral legislature and a judicial system. An election took place in May 1995 in which Meles Zenawi was elected the Prime Minister and Negasso Gidada was elected President. Also at this time, the members of the Parliament were elected. Ethiopia's second multiparty election was held in May 2000. Prime Minister Meles was one again elected as Prime Minister in October 2000. In October 2001, Lieutenant Girma Wolde-Giorgis was elected president.
In 1998, a border dispute with Ethiopia led to the Eritrean-Ethiopian War, which killed thousands of soldiers from both countries. While the war hurt the nation's economy, it also strengthened the ruling coalition. The border war ended in 2000 with a negotiated agreement known as the Algiers Agreement. One of the terms of the agreement was the establishment of a UN peacekeeping operation, known as the United Nations Mission in Ethiopia and Eritrea (UNMEE). Another term of the Algiers agreement was the final demarcation of the disputed border area between Eritrea and Ethiopia. After extensive study, an independent, UN-associated Eritrean-Ethiopian Boundary Commission (EEBC) issued a final border ruling in 2003, but its decision was rejected by Ethiopia. As of 2007[update], the border question remains in dispute, while a tentative peace remains in place.
In 2005, during the general elections in Ethiopia, allegations of irregularities that brought victory to the Ethiopian People's Revolutionary Democratic Front resulted in widespread protests in which the government is accused of massacring civilians (see Ethiopian police massacres).
With the collapse of the Soviet Union, and with the rise of radical Islamism, Ethiopia again turned to the Western powers for alliance and assistance. After the terrorist attacks of 9/11, the Ethiopian army began to train with US forces based out of the Combined Joint Task Force - Horn of Africa (CJTF-HOA) established in Djibouti, in counterterrorism and counterinsurgency. Ethiopia allowed the US to station military advisors at Camp Hurso.
In 2006, an Islamic organisation seen by many as having ties with al-Qaeda, the Islamic Courts Union, spread rapidly in Somalia. Ethiopia sent logistical support to the Transitional Federal Government opposing the Islamists. Finally, on December 20, 2006, active fighting broke out between the ICU and Ethiopian Army. As the Islamist forces were of no match against the Ethiopian regular army, they decided to retreat and merge among the civilians, and most of the ICU-held Somalia was quickly taken. Ethiopian troops continued to occupy Somalia in 2007 as a growing resistance begun to build up. Human Rights Watch accused Ethiopia of various abuses including indiscriminate killing of civilians during the 2007 battle in Mogadishu.