See, I can't even be that hard on the Empire. I don't get the impression that it's cravenness causing them to accept the treaty - remember that they fought very hard in the battle to liberate the Imperial City. They fought the Thalmor tooth and nail for a very long time. I get the impression that they accepted the treaty because it was that or total destruction. And while I sympathize with the point of view that it's better to simply accept total destruction, and make the Thalmor bleed for every kill, at the same time I have to ask, "Well, what if the Imperials' ploy works? What if they accept the treaty, rebuild their strength, then a hundred years later they drive the Thalmor out and reconquer Summerset Isle?" That would seem to justify the Empire accepting a peace treaty that is, on the face of it, utterly unacceptable, and it would mean that the Stormcloak rebellion is simply playing into the Thalmor's hands by further weakening the Empire.
Long-term strategies like that might seem all well and good in the context of history, but that is a poor way to treat people in the short term. Imagine a situation on a more individual level.
Lets say this happens to you in real life...
You, your spouse, and your 2 children are walking to your car one night and are beset by a group of muggers. They demand all your stuff. A fight ensues in which you are hurt badly, but not dead by a long shot. The leader of the muggers offers you a deal. You get to live, but they are taking one of your teenage daughter with them. What do you do? Would you tell them to shove it and fight them again realizing that you might die in the process, or do you let them take your daughter figuring on the "long-term" strategy that once you get to safety you can contact the police and they MAYBE able to find her? Who knows what they might be doing in the meantime.
The latter option is what the empire chose and the Nords of Skyrim were that sacrificial offspring. I, personally, would fight back even if it meant my death in such a situation. There is no way I could ever accept the latter 'long-term' strategy considering the consequences.