What a funny spot for that! It is kinda cute...could you relocate it? Or make it into an accent wall, with some wild/interesting/rich wallpaper around it? If it weren't an external wall, I'd suggest building in a wall of bookshelves into the studs, but i don't think that is possible there...moving it seems the first choice.

If it stays, then maybe changing the pretty oval mirror for a tall rectangular one to echo the "fireplace" shape and fill in the space above. Is the baseboard/molding only on that wall? (I can't see in the rest of the picture well enough to see if the same material has been used). the way it just ends at the door looks a bit odd, so perhaps run it up to frame the door as well and create more continuity?

The more I think about this, the trickier it becomes. I cannot wait to hear what ideas others come up with for this one!