It is actually not common at all for most vets to assume a dog has SM -- more often they know little to nothing about SM and miss the diagnosis in dogs that do have it and/or insist it cannot be SM (the experience that most people I've come across with SM cavaliers have had). Unfortunately, there is a very high incidence in the breed, and a much higher incidence in cavaliers bred from parents who were not MRI scanned and where the breeder didn't use the SM breeding protocol. Most cavaliers will eventually have SM I am afraid (70% at least is the current estimate by researchers) -- but most of those will either not have symptoms and lead a normal life or have mild symptoms. I have had five cavaliers and three have SM (on MRI). The general breeder experience when they scan seems to be about 50% of cavaliers they scan under 5 having SM (numerous breeders have made this comment on breeder discussion sites).
One thing that is very difficult, is for any of us to give a definite response, as your vets have actually seen your puppy with this problem -- whereas we haven't, and people can describe symptoms in many different ways. If you had two vets feel suspicious, then perhaps there is indeed more to look into -- however, as noted before, as you describe it this doesn't sound like SM and would be unlikely in a puppy that age. So perhaps some other issue.
The reason for the frusemide is that it is a diuretic and helps lower the pressure of the fluid (CSF< cerebrospinal fluid) circulating around the brain and into the spinal column, which sometimes will help SM dogs. I don't know if the diuretic affect would actually have much adverse impact on a dog with diarrhea or mild dehydration but possibly it could.
The prednisone would be to help pain but generally it is something only given when other medications do not work, or to give immediate help for painful symptoms. It doesn't sound as if you were seeing pain.
The vet(s) you saw do sound pretty callous
but the concern would be that they both felt they saw something that may be a serious problem and possibly neurological. If it was just one, that would be one thing, but you are saying two checked the puppy and thought there was the possibility of SM, which is a bit more of a concern (not necessarily of SM but something beyond this being a weak puppy getting over a virus; a puppy would have to be really sick to lose control of their legs for a couple of days, so this to me still sounds more involved, one way or another). Did the vets actually tell you that you needed to consider putting down your puppy right away? You hadn't mentioned this in your initial post? That would be pretty extreme with any illness, especially one not yet diagnosed!
By the time an ear infection gets so bad that it goes to the inner ear and affects balance (which is considered an emergency and can cause permanent deafness) you should have seen very obvious, persistent signs of an initial infection such as persistent ear scratching and head rubbing and head pain/ear sensitivity (yet these can be signs of SM as well -- making it hard to diagnose on basic symptoms alone and impossible hard for vets to do without an MRI). An inner ear infection would be unlikely to clear up so fast or with a short term dose of antibiotics or would recur (usually several weeks of antibiotics along with other treatments are needed; also middle and inner ear infections would be really rare in a young puppy according to vet manuals). See
http://www.petplace.com/dogs/otitis-interna-and-media-in-dogs/page1.aspx
However again -- I cannot understand how they would not then give a menu of options to you. One option would indeed be to return a puppy right away rather than be faced with large vet bills and the difficulty of having a dog with a serious health issue and this is one option that any honest vet would have to suggest, but it should never be the only option and I can't believe they thought there could be something as serious as SM yet didn't steer you to the next step, a referral to a neurologist. Vets do not have the ability to diagnose this condition in most cases as they don't have 1) MRI machines, which costs millions 2) the training to read MRIs for this complex condition and 3) the neurology training to then advise on treatment. Your old vets really do need more education and would be best steered to Dr Rusbridge's website as it has much detailed info for vets.
Most vets are good on cavaliers in the UK as the breed is so common. I would just ask around for recommendations on a good, solid general vet practice. A good vet would have given you much more information on possibilities and suggested a referral if symptoms did not go away or if they return.
As you have a much happier pup right now, I think your focus should be to ask around and find a vet practice you like. Angela would be a good person to email. If there is a more serious problem, the things you saw will recur and at that point, I'd get to your new vet and then go from there. It is always helpful to video any odd or unexpected symptoms for a vet which is easy to do on phones these days.
I would certainly explain to your new vet what you saw and went through just so that they know there was some strange episode that remains unexplained. If there is any chance at all of a suspected ongoing ear infection especially an inner ear problem, I'd immediately get her in to the new vet of your choice.
With neurological problems, symptoms can come and go so you will want to at least keep that in the back of your mind and act if you see anything recur. Hopefully whatever it was, will now be over.