Of course they could have fought on. Armies have come back from far worse situations, and German armies are particularly noted for resourcefulness and resilience.
And I don't see how the peace terms could have been any worse, short of chopping Germany into bits. They had to submit to annexation, occupation and reparations intended to keep them in debt forever. The Versailles Treaty was the worst mistake of the C20th. JM Keynes called it "the Peace which passeth all understanding," and he helped to write it.