If you can't clean up the painted edge, you could always add a 1x3 piece of wood as molding. You can even carry it up to the ceiling to frame that wallpaper. I don't see that paint color in the wallpaper, or maybe it's a lighter version of the flower centers. Maybe stencil on a design using the darker color, or another color from the wallpaper to help tie it together. Then narrow floating shelves or vertical frames or something in the painted areas it you feel you need it. Maybe turn the bed around so the wallpaper is the headboard.

There is contrast between the traditional furniture and the focal point of the floor which pops, draws attention. I would recover the sofas in cream colored soft fabric - suede. I would leave the curtains grey, and put down a large neutral area rug. The edges of the room would show the pattern of the floor. I would color the wall and add texture to it, but not too dark as the room will appear smaller. Add a picture and put a nice plant holder, large vase in the left corner of the room - an oriental-style vase. Or, a cream-stripe fabric on the sofas. You could go soft or bold in this room - depending on your taste.

Its a really lovely room! what a great place for kids to share. I like kids sharing rooms. I think you need another colour to tie it together. I would suggest a blue tone.... teal, navy blue, duck egg blue. to tie it together. Its a little to pale and looks sparse, but actually isn't. I would leave everything exactly as is, BUT, paint the back wall behind the bed teal and find a simple navy blue wall decal that is fun and kid- like maybe one with a sillouette of a boy and girl playing. I would paint the wall behind the sofa duck egg blue. Then I think it would suit both kids more and look more kid friendly. the blues will balance the pink and cream, but because you have a pale carpet i don't think it will look too dark. don't worry about making it totally kid like, its a room they will grow with, not a kindergarten, and it also needs to peaceful and restful for sleeping. besides with their art on the walls and bright toys everywhere it soon looks bright and kid like. Good luck!

On your paint problem I can't be much help. This usually happens because of damp -- please get a damp expert to make sure that there isn't any damp lurking in your walls. I had this once when I had pipes leaking inside the walls. I didn't know that. The other alternative is something like painting before the plaster is dry or some kind of chemical mismatch. I do know you will have to scrape all the mucky powdery stuff away and start again, at least on those areas. Don't try to seal and prime and repaint until you know exactly what the problem is and how to fix it.