Vatican City has an autonomous government, complete with a national currency, post office and flag. The Catholic pope resides here as both a political and religious leader. The Catholic Church desires the maintenance of this state so that no nation may claim the pope for its own and thus attempt to influence or control the Church via political means.
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Vatican City is the smallest independent state in the world in population (832 people) and size, at 0.17 sq. mi. (0.44 sq. km.). It is located within the city of Rome, Italy and gained it's independence from Italy in 1929. The head of state is the Pope.
Vatican City is a city, but it is also a country; it is basically an city-country.
The Vatican meets all four elements to be considered an independent country or state:
1.) It has a defined territory.
2.) It has a permanent population.
3.) It has a government.
4.) It has sovereignty.
Prior to becoming an independent nation (state) the Vatican was simply part of Rome and before that was a part of the Papal States. In 1929 the Lateran Treaty was signed between Mussolini and Pope Pius IX which created Vatican City as an independent nation.
Vatican City became an independent country in 1929 and this required that they form their own government as they were no longer a part of Italy