This reaction is an example of Williamson's synthesis. C2H5O- will extract proton from phenol converting the latter into phenoxide ion. But C2H5O- is a better nucleophile than C6H5O- (phenoxide) ion because in the former the negative charge is localized over oxygen, while in the latter it is delocalized over the whole molecular framework. So, it is C2H5O- ion that would make nucleophilic attack at ethyl iodide to give diethyl ether (Williamson's synthesis).