A small island Nation tucked up into the North Atlantic Ocean is certainly no threat to anyone. However, the size of a country dosen't always determine the power and/or vulnerabilty. For example, Israel is no bigger than the state of New Jersey, but has a nuclear weapons program, and (with the United States help at least) fought off their Arab neighbors.
Not to mention they are the most devoped and advanced country in all of the Middle East, which maybe part of the reason why their neighboring countries hate them.
But lets not get into an Arab/Israel debate and discuss ways we can make the country of Iceland a major Nation.