They need to rename the European Union if they are going to let countries that aren't even part of Europe in. 
Oddly enough, being geographically in Europe isn't actually a requirement to join.
Per what is now (IIRC) Article 49 of the Treaty on European Union, only European states may apply to join. Also worth nmoting that not being European was the reason given for rejecting Morocco's application in the 80's.
geographically speaking Iceland is only half on the Eurasian tectonic plate where as the western half is part of the North American plate, so really something like 90% of Iceland's population lives in North America (only using very broad terms though). Though using this definition parts of Russia and Japan would also be included in North America. link:
http://www.iris.edu/seismon/imgs/plates.gif
