I can help with that (ignore the bit about your pictures folder and read the parts relevant to external drive - including the notes about formatting):
1 - Create a new EMPTY library in your pictures folder. (Hold down the option key while starting photos, and click "create new". Name it something that is easy to recognise). If you don't have enough space on your mac to download the full iCloud library with plenty of headroom, then you'll need to put the new library on an external drive (formatted APFS or MacOS extended)**
2 - Open the new empty library in photos. (it should open after you click "create new" but if not, use the option key start again, and select the new library from the list.)
3 - In photos preferences set it to the system library (click the circled button)
4 - In photos preferences iCloud - turn iCloud on with download originals.
5 - If you already have images in iCloud they will sync to the library. Let that complete before importing new ones.
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** If using an external drive:
It must be formatted APFS or MacOS extended (journaled) (preferred for spinning drives). Not case sensitive. If you have not formatted it after purchase it will most likely be ExFat - which is not compatible.
It Must not be (or have been) used for time machine. (A time machine drive can be used if re-formatted)
It must have the 'ignore ownership" checkbox ticked.
It must be directly connected (No ethernet or wifi)
See
Move your Photos library to save space on your Mac – Apple Support (UK)