The variable declared at line 4 is an instance variable. You can certainly declare this variable static, but then it becomes a class variable.
So, the reason you can't declare an instance variable static, is because as soon as you do, it becomes a class variable. There's no such thing as a static instance variable.
Build a man a fire, and he'll be warm for a day. Set a man on fire, and he'll be warm for the rest of his life.
An instance variable belongs to an individual class object. So in this class:
The String 'name' is an instance variable. Every object of this class has its own copy of name (which is set when the class is instantiated). The int 'counter' is a static variable, which means that it is shared by all objects of type Example. So, if you create three objects of type Example, counter will end up with a value of 3 (ignoring thread-safety issues).