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The weird thing is it is playable in CK2, which I have enjoyed playing, but doesn't exist at all in EU. I know it didn't exist in this period, but its culture did, & it wouldn't have been unreasonable to have become free if the right circumstances had occurred.
The Norwegian national ideas actually fit Iceland reasonably well. Not perfectly but reasonably. Write new Sagas in particular actually fits Iceland better than Norway since almost all of the sagas were written and preserved in Iceland.
But if Iceland gets its own ideas it better have something to do with the Althing and the written traditions.