The effect is applied, but it's applied to the entire image. Now we need to filter it so that it's not applied on the edges.
Add a layer mask to the top layer (Layer> Add Layer Mask> Reveal All).

Make sure the layer mask is activated. The thumbnail of the layer mask in the layers window should have a white border around it. If it doesn't, click on the thumbnail to activate the layer mask.
With the layer mask activated, use the Apply Image tool to apply the following properties:
Layer: Background
Channel: RGB
Blending: Normal
Opacity: 100%

Apply a Find Edges filter (Filter> Stylize> Find Edges). The image should now appear to have its edges restored.

If you look closely at the image, you'll be able to notice the outline on the edges. To remove this, we'll simply apply a gaussian blur with a radius of 1 pixel.
