Vatican City is a renewed version of the old Papal States.
Italy is a fairly new country. Prior to Italian unification, there were several Italian states, such as Venice, Florence/Tuscany, Naples, etc. The Papal States, with Rome as the capital and Pope as its leader, was one of those states and founded around the 8th century. In the 1860s and 1870s, the newly unified Kingdom of Italy pretty much annexed all of the Papal States. The Pope however remained in St. Peter’s Basilica in Rome and refused to surrender to Italy. For nearly 60 years, the Pope was a quasi-prisoner in Rome who often spoke out against the Kingdom of Italy. The various popes basically encouraged all Catholics to refuse to accept Italy as a country. In the 1920s, Mussolini took control of Italy and tried to resolved this issue with the Pope. In the 1929 Lateran Treaty, Mussolini gave the Pope his own country (the Vatican) in return for the Pope’s support of his regime. Vatican City has remained a sovereign state since then.
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