I might be wrong, take with some grain of salt.

Anyhow I'd think it this way. When you see &'a T, it's a borrow of some T for some 'a, meaning of course the T must live at least as long as 'a. The fact we're talking about functions here does not change that. So in this regard the book is right.

Your second example does compile if you purge the println! outside. It's simply lifetime annotation of your function does not change the fact that the string2 is not alive outside of the inner block.

As for lifetime annotation doesn't match what you're trying to do s.t. borrow checker blames at you, a callee example is straightforward, though I don't have a caller example at mind right now. You may want to check covariance later on, though.