I'd put up a curtain rod almost by the ceiling and then hang up some thin, almost see-through white curtains that go all the way to the floor. They have cheap but nice curtains like this at IKEA.

Making the curtains cover a larger area than just the window makes the window look bigger and thin white curtains won't remove any of the light.

You could use a window film over both windows, that way you will still get all the light, but privacy as well. I think you can even get pretty patterned window films...that would be nice!

I would put up roman shades to cover those windows. I cannot think of anything else that would look as good in your area. You could use a light weight neutral lined, a linen or something similar since the treatment is pricey and you want it to be timeless.

Home depot has many different styles of window film, if you are interested.

Roman Shades - Definitely.

I second the privacy film idea. I had a similar situation in my apartment and I used the Emma Jeffs stuff:

http://www.designpublic.com/shop/home-accessories/window-film

a little pricey, but pretty cool designs

I would do a single roman shade across both windows in a bright, sheer fabric, maybe with a simple modern trim.

Perhaps fabric redi shades on the bottom half of the window?

If you are interested in double-hung shutters you should check out PV solar shutters, they collect solar energy. You need sunlight to produce solar energy so the window would need to be South or West facing.

What about 2" wide wood blinds with cloth tapes to keep the graphic shape of the window frames expressed? Blinds are nice because they can screen the view without blocking it entirely.

You can get cordless top-down, bottom-up shades. I've seen them at Lowe's/Home Depot.

I think you should look into Hunter Douglas blinds. They can run a little pricey, but they have a wide variety of top down/bottom up shades, including cordless. They also have a lot of options in terms of how much light a window treatment will let through, including some wide slat blinds that are encased in a sheer fabric to provide privacy but also let light through.

Here is a wonderful site for window film.....

http://www.brume.co.uk/

I'd go with grommeted panels, either in a modern take on cafe curtains with the rod at the same height as the sash, or at the top of the window in a tailored to fit length. Go with light weight unlined panels to let the light filter in.

For this type of situation, I use tension rods made especially for windows (they come in white, brass yellow, etc., are very inexpensive, and are available at home improvement stores and elsewhere). I place the rods about 1/4 of the way down from the top of the window and then hang curtains on the rods to cover the remainder of the window to the desired length. This way there is always as much light as possible from the upper uncovered portion of the window, and plenty of privacy in the lower portion. You can also use the same setup for the larger window; if you use the same fabric, it will match the smaller window even though the lengths are different. Finally, placing some mirrors around will help bounce the available light throughout the room. Try it, you'll like it.

Privacy film is the best way to go, offers privacy but preserves light, you can find it in patterns (some have been featured here on AT) or cut-in your own patterns (if you enjoy that sort of craftwork). I've even used it in rooms where I want to mask an unpleasant exterior view of a fence - and - in the living room window where I don't want to be visible but I want space where the pets can perch in the window and see outside (so there are 'thought' bubbles cut-out for them to view out but the rest of the window is masked by the privacy film).

Roman shades directly on the inside windows - or rather, roman SHADE. I think you should treat the pair of windows like one window. It'll feel like less clutter. You can buy a pattern for roman shades or find one online - they're not rocket science - and make them out of whatever fabric you want.

Put a throw pillow or two on the ledge that invites people to sit there.

Then use the "cheap but nice" IKEA curtains mentioned by B from Stockholm on the *outside* of the ledge, from floor to window-top. You can use a tension wire to hang them if you want an industrial, minimalist look, rather than a curtain rod. You'll get some nice depth, the impression and functionality of more seating, and a nice little private spot to read a book or be on a laptop.

Also - this is really hard to do without knowing what the rest of the living room looks like.

How about some light airy curtains on a curtain rod with inside end mount brackets? You can pull the curtains all the way to the sides so the light comes in but still have privacy when you need it.

http://madeofmetalcurtainrods.com/brackets.html