Europe's westernmost country, Iceland has a strategic location in the North Atlantic, just south of the Arctic Circle. Its position, on the rift where the North American and European continental plates are pulling apart, accounts for its 200 volcanoes and its numerous geysers and solfataras. Previously a Danish possession, Iceland became fully independent in 1944. Most settlements are along the coast, where ports remain ice-free in winter.

Descended from Norwegians and Celts, Icelanders form an ethnically homogeneous society. Almost all follow the Evangelical Lutheran Church. More than half the population live in or near Reykjavík. Living standards are high, and there are few social tensions.

Strengths

High-tech fishing industry with exclusive access to prime fishing grounds. Strong economic recovery in late 1990s; low inflation and unemployment. Very cheap geothermal power.

Weaknesses

Over 70% of export earnings derived from fish. Large state-owned banking sector restricts market flexibility.

From independence Iceland has been ruled by coalitions, but in the 1980s the traditional four-party system began to splinter. After the 1991 election, a new IP–Social Democratic coalition promoted market-led reforms. Arguments over whether or not to join the EU were defused in 1992 with the successful negotiation of the EEA, giving Iceland access to the key EU market.

The coalition collapsed after the 1995 general election, when both parties had lost support, and was replaced by a center-right government led by the IP, with David Oddsson as prime minister. He has successfully built on a recovery under way since 1994 and strengthened his position in the 1999 general election.

Although a member of NATO and EFTA, Iceland has traditionally maintained arm's length relations with the EU and the USA. Major disputes have concerned fishing rights. Iceland left the International Whaling Commission in 1992 when a commercial whaling ban was extended, but rejoined in 2001. Links with other Nordic states are strong.

A NATO member and an associate WEU member, Iceland has no armed forces. US troops are based at Keflavík.

Iceland has virtually no minerals. All energy needs are met by geothermal and hydroelectric sources. It has implemented measures to try to restore once abundant fish stocks.

Iceland has no nuclear or coal-fired power plants. Pollution levels are low. Believing that minke whales eat valuable cod stocks, Iceland resumed whale hunting in 1992. The 1996 eruption of the Loki volcano under Vatna glacier caused extensive flooding and damage.

Icelanders rely entirely on cars and internal airplane and helicopter flights. Most freight moves by sea. The only main road encircles the island.

The state health system is free to all Icelanders. Iceland has one of the lowest infant mortality rates and one of the highest longevity rates in the world.

Icelanders buy more books per capita than any other nation. Education is state-run; some 40% of school students go on to university at Reykjavík or Akureyri, or to colleges in the USA.

Crime rates are comparatively low. The rate of alcohol-related murders is higher than the European average.

Wealth distribution in Iceland is comparatively even and social mobility is high. Domestic heating, from geothermal sources, is provided at almost no cost.

Iceland is promoting itself, especially in Japan, as an upmarket destination for tourists attracted by its spectacular scenery, glaciers, green valleys, fjords, and hot springs.

Settled in the 9th century by Norwegians, Iceland was ruled by Denmark from 1380 to 1944, becoming fully self-governing in 1918.

• 1940–1945 Occupied by UK and USA.
• 1944 Independence as republic.
• 1949 Founder member of NATO.
• 1951 US air base built at Keflavík despite strong local opposition.
• 1972–1976 Extends fishing limits to 50 miles; two "cod wars" with UK.
• 1975 Sets 200-mile fishing limit.
• 1980 Vigdís Finnbogadóttir world's first elected woman head of state.
• 1985 Declares nuclear-free status.
• 1995–1999 Formation of center-right coalition under David Oddsson after general election; reelected in 1999.