The way I see it, Titus Mede didn't realize that no matter what, the Thalmor mustn't be given the opportunity to get footing on the mainland, not to mention land populated largely by humans.
I think the fact that the Mede's have shown little to no sign of great leadership has been obvious so far, but that's not up for debate. But he needed the treaty to keep the Empire alive and most importantly keep his throne. If there was no treaty, the Empire would have been crushed. After all it took Hammerfell 5 years to fight them to a standstill; not a defeat.
We don't have any sources about how Alinor went on after the Great War, but the way I see it they've been using the time to regain new resources for warfare and of course raise their numbers as good as possible (if you read the letter of Elenwen to Sanyon, a Thalmor laying dead at the Shrine of Talos near Lakeview Manor/east of the lake near Falkreath, she says that her men are "spread thin enough"; guess the Dominion wants to keep their soldiers at home for a reason?). That theory is only supported by one of the Jarls at Diplomatic Immunity saying that he heard rumors that the Thalmor are gathering their strength to launch another attack.
Should Skyrim become independent, the Empire looses the source of some of its best soldiers, and High Rock will be cut off Cyrodiil, making communication difficult. I don't want to defend this damned concordat or anything it represents, but if the people of Skyrim don't stay put, and Cyrodiil is taken by the Dominion, things are going to get bad real quick. And real bad.
Corrupted politicians can easily be killed, but if the Empire falls, I don't see who's going to keep the Altmer from erasing humanity of Nirn's surface.
Another theory of course could be that the Dominion is struggling with inner conflicts themselves, their forces only held up in numbers by forceful recruiting and their populace partly starving themselves because all food and resources goes to the army... but that's up for debate, too. Especially since they are the biggest economic power in Tamriel as well. And as Lathenil wrote, many Altmer embraced the Thalmors' ideology (is that much of a surprise though? Altmer have been known to think of themselves as the perfect race, the perfect society; and thus logically the rightful rulers of Tamriel, no?), so recruitment shouldn't be too tricky. Not to mention all the Altmer that might want revenge for their fallen fathers, friends and so on.
There's just not enough information given to make 100%-true conclusions. Both parties have plenty of grey areas. And while Ulfrics' goal, to see the Thalmor bleeding as much as the people kidnapped into their concentration camps, might be noble and right, we don't know enough about him either.
Plenty of his behavior has shown that while he talks his men into glory-or-death-battle-deaths, his own willpower can't keep up with that. To be honest, I believe that there's a certain amount of fear behind that too. Doesn't want to see his country going down along with Cyrodiil should the Dominion crush the Legion. I really hope he's not one of those rats leaving the sinking ship like my guts tell me.
Remember that the Empire still holds Morrowind, High Rock, Black Marsh, and the Orcs would help too. Do you really think that Hammerfell and Skyrim could fight these provinces off and the Thalmor (Valenwood, Elsweyr, and Summerset Isles)?
Right now, the Empire consists only of Cyrodiil, Skyrim and High Rock. Black Marsh and large parts of Morrowind are under Argonian rule, and what's left of the country to remain being called Morrowind is currently independent, in a way. "Abandoned" would fit better though.
And no, I doubt the Orcs would help. They keep to themselves or simply state that "it's not their fight".