I was hoping ther was an easier fix but you do what you have to do.
To mangle a metaphor... you can't stuff 10 pounds of flour in a 2 cup container
This is not a cut and dry matter of photo scaling as might be suggested. Premiere Elements 7 is throwing a block for your photo import because the total number of pixels for the image exceeds Adobe built in limit,1677216 pixels. The situation is fully described in my post numbered 6 in this older Premiere Elements 8.0/8.0.1 thread
Consequently, you are getting the following Premiere Elements 7 message/block
Your answer is to resize or crop/resize your photos before you import them into Premiere Elements 7.
You will find this type of message and block in this situation for Premiere Elements 4, 7, 8, and 9, but not 10, 11, and 12.
Just because you are not blocked by the size of your photo import in these more recent versions does not mean that you should take advantage of the situation. You may be dangerously compromising your project by photos oversized for the project when your computer resources can not handle this. The typical not to exceed numbers are
SD 1000 x 750
HD about 1920 x 1080
Depending on the level of computer resources, in the later versions, one might stretch these not to exceed suggestions. But no matter how high the resolution of the photos imported, they will end up according to the size specification of the export standard.
Any questions, please do not hesitate to ask.