Years ago, in the early days of the financial crisis, Cyprus was one of the first European countries to reassure bank savers of relatively modest means by guaranteeing their deposits up to a limit of €100,000. What this meant was that the government made a promise. Anything could happen to a bank. It could go bankrupt. Branches could crumble into lumps of concrete and shards of glass, servers explode in showers of sparks, cashiers and mortgage consultants plunge flaming from fourth-floor windows, and small savers would still get their money back.

Suppose, for instance, a Cyprus bank adopted lax practices. Suppose it took in deposits from trusting small savers, pooled it with money of uncertain provenance from Eastern Europe – suitcases of cash were acceptable – and used it to gamble, lending it on to risky businesses. Suppose these lax practices weakened the bank to the point where it went bust. Under the deposit guarantee plan, this would not be a disaster. A lousy business would have succumbed to the pressure of the market. The big losers would be the bankers and the fat cats with millions deposited in the banks: they would lose heavily, but what were they doing with so much money if they didn't know how to look after it? The modest savers, those with €100,000 or less, would walk out of the rubble unscathed, not having lost a cent.

How is it, then, that when real banks in Cyprus face actual financial collapse as a result of their conduct, it is not the banks themselves that suffer, nor the foolish rich who stashed their money there, but those savers of modest means who were promised their money was sacrosant? Those who thought they were safe with the guarantee are now being hit with a tax of €6.75 for every hundred euros they have in savings, in order to save the banks that screwed them over. It is true that those with over €100,000 are being made to pay more – €9.90 for every hundred euros – but the percentage game is in itself a game for the rich, whereas the less well-off live in a world of absolutes. A euro savings millionaire still has €901,000 left after the levy. If you're saving up for a €200 plane ticket, on the other hand, and your savings go from €200 to €186.50, you don't fly.

As I write, Cypriot and German politicians are blaming each other for the terms of the deal. This seems to me to be missing the point. Whether it was Germany who was to blame by insisting bank customers help pay for a loan to restructure the Cyprus banks, or Cyprus who was to blame by not wanting to over-tax the rich Russians who have pumped so much money into the island, the fact is that neither side was prepared to insist on honouring the deal to protect the less well-off. Nor did either side, it seems, dare consider asking the big foreign financial institutions foolish enough to lend Cyprus banks €1.7 billion over the years if they would mind taking a loss on that investment.

The most predictable moment in the Cyprus debacle came when George Osborne piped up to cite it as a dreadful warning to Britain to continue on the path of austerity or face disaster. Whatever bad happens in Europe, as far as George Osborne is concerned, is a dreadful warning to Britain to continue on the path of austerity or face disaster.

Recent events in Cyprus have nothing to do with routine government spending, with austerity or stimulus, and everything to do with what happened in Britain, Ireland and Iceland a little over five years ago. What's happening in Cyprus is not, at its heart, about a government failing to pay its way, but about banks failing to pay their way, and having to be rescued by government. If there is a government failing it is not that it spent beyond its means but that it allowed the banking sector to swell to grotesque, unsustainable proportions, like some obscure organ of the body that has bloated up until it can't be removed without destroying the host, and all the resources of the body are consumed by the need to carry it. In Cyprus, the less well-off face a deposit tax to pay for the rescue of their banks by Europe and the IMF; in Britain, we continue to endure spending cuts, higher VAT and the hidden tax of a weakened currency as a consequence of a bank rescue carried out from our own resources. We rescue our banks; who will rescue us?