Has the EU Completely Lost It's Mind with This Proposed Cyprus Bailout?

Seriously, I just don't know what the Europeans were thinking.  In case you haven't been following this, they agreed to bailout Cyprus in exchange for a 6.75-9.9% tax on bank deposits.  There is just so much wrong with this on so many levels that it pretty much guarantees that people will lose trust in their banks.  Here are a few:

Cyprus, as part of the EU, has a deposit insurance guarantee, just like the FDIC guarantee in the US of the first $100,000 (or in this case, Euros).  The whole purpose of deposit insurance was to make it so people would trust their banks and take their money out if they got worried about the bank possibly collapsing for whatever reason (bad loans, the economy etc.).  This took money out of people's mattresses and into the financial system at large as the banks would then lend that money to individuals and businesses that wanted to actually do something with that money.  As everyone immediately realized, this is not a wealth tax, it is a wealth tax on wealth deposited in banks.  So what will people do now?  Take their money out of banks because it is unsafe.  They will probably do it in any country where they feel that might have to ask the EU for a bailout.

Banks usually pay depositors interest in order to attract funds.  How can they possibly attract funds if the money deposited goes down?  People don't put their money in the bank for the sake of having a checkbook and ATM access (if you have your money in a mattress or personal safe you have 24/7 access to your cash).  It's to keep their money safe and maybe earn a little off of it.  This proposal drives a knife into the heart of the banking system (at least in Cyprus and probably in other troubled nations) as it makes clear that your money is neither secure nor are you earning any money off of it (quite the opposite).  

I know that people are talking about "moral hazard" and how such punitive actions are justified.  Russia oligarchs looking to escape Russian taxes shouldn't be bailed out by the Germans.  This is exactly the wrong way to look at it as you are punishing people who did nothing wrong nor had anything to do with this crisis.  What unusually risky behavior were people with money deposited in a bank engaging in?  Seems like that is the safest upon safe behavior, behavior that actually benefits the economy at large by making that money available to others through the bank's lending.  They weren't engaged in weird derivatives or triple leveraged CDO's.  They had their money in a friggin bank which is supposed to be safe giving the deposit insurance.  This bailout essentially aims to punish the good guys, the savers who do nothing wrong.  Let the Russian government worry about whether the Russians who had their money in the banks were evading taxes (considering that Russian government controlled entities also had money in Cypriot banks, it seems the Russian government itself is fine with it).  

Luckily the Cypriot government has done the right thing so far and not a single member of parliament voted for this scheme to tax savings.  The vote was 0-36 with 19 abstentions.  It's possible that the Germans made this deal so onerous that Cyprus would actually reject it and send a message to everyone that the era of bailouts is over.  But I wonder what that does to Portugal, Spain and Italy in the coming months.  Probably nothing good.