[Libertas Omnium Maximus]

I agree with making it much smaller, though I think it's unnecessary to move it inside of another nation's territory. The current status and situation of the Vatican is a result of the Catholic Church's history and there's no reason we really need to replicate that in our fictional world, imo.

It doesn’t have to be inside of a city. It could also be its own city, which probably makes more sense. If it is it’s own city, it needs to have an airport and possibly even a harbor.

However, if it IS only a few dozen buildings then I do think that it probably has to be attached to another nation for pure logistical reasons (Transportation, housing of guests, etc.). Right now the nation is floating in the middle of the woods.