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.

Upholstery and egg crate type foams will not be rigid, and may not be flame retardant. EPS and XPS construction insulation foam are lighter weight, more rigid, and could be covered with batting and fabric. They come in 4'x8' sheets, but can be cut with a utility knife into smaller sizes. They are available from a big box home improvement store like HD or Lowes. Not sure if they are flame retardant. Depending on how large a piece you are mounting, I would think they may be light enough in weight that they could be mounted to the wall with 3M removeable hangers of some sort.

Perhaps a large round table might mean a rug is not at all necessary. It could be a metal tray table, or carved wood like Rebecca Mitchell Interiors illustrates. Ideas also to consider, using multiple tables can be found at http://www.houzz.com/multiple-coffee-tables. I also agree with comments above that some color is needed on the walls. You could then hang round mirrors, or an unusual curved shape like RMI shows above.

I like the room but it looks a bit empty. Possibly some contemporary low interesting cabinet on either side of the fireplace some organic baskets or metal vessels of some sort on top of the cabinets. It will fill in the bareness between cabinet and sconces. Roll down textured shades at the windows would add a nice fill in touch and add privacy and block light. Or simple linen floor to ceiling curtains on rods at ceiling height. Here are three rooms with free standing cabinets and long curtains at the windows. You might like these ideas for not. Art work could be under the scones with lamp for ambient lighting Again simeple cabinets and surprise, a TV stand too. This is a lovely idea too with the twigs; could change seasonally. I like the benches for warmth and texture and softness and the chandelier adds a dramatic touch. Good luck with your lovely room!