Do you usually seat 4 in that space?

P Banos, we rarely use the space but my adult daughter said she doesn't sit there when she visits because it feels too tight. The only time we use it is during holidays when we need the extra seating. Actually, I have a total of 6 counter stools around my counter and island so I don't know that I really need to seat 4.

Adding a rectangle table will allow for more flow, also adding a bench or set of chairs that will pull more flush into the table more will give more space to walk

A semi flush light and 4 recessed cans in the ceiling will brighten up the room and offset the heavy wallpaper

Well then I'd start by only having two chairs left there normally, with a drop leaf table. When you need extra seating open the leaf(s) and bring in chairs.

Or consider alternatives to a table/chairs. An arnchair or rocker with a bookshelf or side table to make a reading area. A single chair and small desk to make a home office. No rule that you need to have a table in the kitchen if you sit at the counter!

I like P Banos' idea of a drop leaf table and two chairs. I would think about a lighter, airier chandelier for the space as opposed to a flush mount or semi-flush, which never feels right over a table to me.