Claim: Ingólfr Arnarson was the first permanent settler on Iceland.

Iceland -LRB- -LSB- ˈaɪslənd -RSB- -LSB- ˈistlant -RSB- -RRB- is a Nordic island country in the North Atlantic Ocean . It has a population of and an area of 103000 km2 , making it the most sparsely populated country in Europe . The capital and largest city is Reykjavík . Reykjavík and the surrounding areas in the southwest of the country are home to over two-thirds of the population . Iceland is volcanically and geologically active . The interior consists of a plateau characterised by sand and lava fields , mountains and glaciers , while many glacial rivers flow to the sea through the lowlands . Iceland is warmed by the Gulf Stream and has a temperate climate , despite a high latitude just outside the Arctic Circle . Its high latitude and marine influence still keeps summers chilly , with most of the archipelago having a tundra climate .   According to the ancient manuscript Landnámabók , the settlement of Iceland began in the year 874 AD when the Norwegian chieftain Ingólfr Arnarson became the first permanent settler on the island . In the following centuries , Norwegians , and to a lesser extent other Scandinavians , emigrated to Iceland , bringing with them thralls of Gaelic origin . The island was governed as an independent commonwealth under the Althing , one of the world 's oldest functioning legislative assemblies . Following a period of civil strife , Iceland acceded to Norwegian rule in the 13th century . The establishment of the Kalmar Union in 1397 united the kingdoms of Norway , Denmark and Sweden . Iceland thus followed Norway 's integration to that Union and came under Danish rule after Sweden 's secession from that union in 1523 . Although the Danish kingdom introduced Lutheranism forcefully in 1550 , Iceland remained a distant semi-colonial territory in which Danish institutions and infrastructures were conspicuous by their absence . In the wake of the French revolution and the Napoleonic wars , Iceland 's struggle for independence took form and culminated in independence in 1918 and the founding of a republic in 1944 . Until the 20th century , Iceland relied largely on subsistence fishing and agriculture , and was among the poorest in Europe . Industrialisation of the fisheries and Marshall Plan aid following World War II brought prosperity , and Iceland became one of the wealthiest and most developed nations in the world . In 1994 , it became a part of the European Economic Area , which further diversified the economy into sectors such as finance , biotechnology , and manufacturing .   Iceland has a market economy with relatively low taxes compared to other OECD countries . It maintains a Nordic social welfare system that provides universal health care and tertiary education for its citizens . Iceland ranks high in economic , political and social stability and equality . In 2013 , it was ranked as the 13th most-developed country in the world by the United Nations ' Human Development Index . Iceland runs almost completely on renewable energy . Affected by the ongoing worldwide financial crisis , the nation 's entire banking system systemically failed in October 2008 , leading to a severe depression , substantial political unrest , the Icesave dispute , and the institution of capital controls . Some bankers were jailed . Since then , the economy has made a significant recovery , in large part due to a surge in tourism .   Icelandic culture is founded upon the nation 's Scandinavian heritage . Most Icelanders are descendants of Germanic and Gaelic settlers . Icelandic , a North Germanic language , is descended from Old Norse and is closely related to Faroese and West Norwegian dialects . The country 's cultural heritage includes traditional Icelandic cuisine , Icelandic literature and medieval sagas . Iceland has the smallest population of any NATO member and is the only one with no standing army , its lightly armed coast guard being in charge of defence .