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Iceland is a sovereign nation with it’s own set of laws and political system. The laws of the UK and Holland do not apply.
Laws of Iceland apply within Iceland. However, the Laws of the EEA are enforced by the European Free Trade Association Surveillance Authority (EFTA SA). Iceland, as a state signed up to the EEA and in doing so accepted all EU laws (with certain exceptions, such as agriculture) in their entirety.
The EFTA SA will present its case to three EEA judges (Norway, Lichtenstein and Iceland) who will rule on the depositor protection law.
The case presented by the EFTA SA look pretty solid. Icelanders have being trying to persuade themselves that the directive has not been tested in court. Well it has so there is precedent.
There is also another thing that will come back to bite Iceland. It protected its depositors 100%, if the EEA court judges that equality should apply, Iceland could be liable for the entire 100% protection it gave to its own citizens, thereby doubling the debt to 8billion, plus adding damages. Incidentally, Icesave is represents 5% of the overall cost cost of the Iceland bailing out its banks, its nothing compared to the other liabilities they have accepted.