In the eighth century, Pepin the Short, Charlemagne's father, gave to Pope Stephen II officially the territories where they established the Papal States. During the Middle Ages they came to understand an important portion of the peninsula, but in 1870, with the creation of the united kingdom of Italy, the territories were annexed by the new monarchy. In 1929, the Lateran Treaty, signed between the Holy See and Italy of Benito Mussolini, the Vatican was recognized as a sovereign state in Italy and, later, by other nations. At the end of World War II, the provisions of the Lateran Treaty were incorporated into the Italian Constitution of 1947.
Yes, for an agreement with Italy may issue the Vatican lira. But usually been used as circulating the Italian lira and the euro now.
The Pope is both head of state and the Catholic Church. In the first of these functions is assisted by the Sacred College of Cardinals. The main institutions of the Holy See are the Secretariat of State, the Public Affairs Council and the Sacred Congregations.