It's not controversial that the Nazi regime was morally bankrupt (it's a huge understatement obviously). But as a question of military history... If you are concerned about violation of Icelandic neutrality, perhaps you should consider that the British occupied the country because they were worried that Iceland might support Germany (which it had no plans to do). This happened in 1940, a whole year before this sinking. Iceland might have been legally neutral but was not neutral in practice due to the post occupation collaboration with the British. Iceland was no different from France or Norway except for being smaller and occupied by the other side. As for dragging the US into the war, the US was including its ships in convoys, escorting those convoys and attacking u-boats on sight, and, topically, using its troops to garrison occupied Iceland to relieve the British. You know, the usual neutral country stuff. The Americans even called this "neutrality patrol" even though the US was anything but. Donitz certainly didn't cause this and, in any event, the geopolitical implications of the war were the responsibility of Hitler. The Germans did consider invading Iceland but decided against it. It would have been useless because unlike Norway, Iceland had little to offer except location. After the fall of France it would have been of no use even as a naval base. And with the British control of the ocean surface there would have been no way to supply it.
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