If you right click on the image, and you choose "Edit" you will most likely find that MSPaint is still the default editor.
If you open the image in Windows Image and Fax Viewer (right click, preview will do it), when you mouseover the Edit button, you see how it says the keyboard shortcut is Ctrl+E? It's right there on your example image. The issue is that you have software currently installed on your system that has overridden this default behavior of Ctrl+E. For example... if you are in Windows Explorer, Ctrl+E opens a search assistant. Ctrl+E in Chrome also wants to perform a search. Ctrl+e now fails to edit an active Remote Desktop session now.
So, when you press that button in Windows Image and Fax viewer, it attempts to perform that Ctrl+E.. instead of the command that is sent when you right click on an image and choose Edit. And somewhere along the line, CTRL+E has been altered. You are not the only person with this issue out there, and for all the registry fixes that are suggested, nothing seems to work to restore this function for those who have lost it.
EDIT it doesn't even matter if you change the default editor in Windows (through a manual registry edit). The Right Click-Edit function will work with the new program (or MSPaint, or whatever you choose), but the Edit button of the picture viewer still won't open ANY editor.