England's chastening campaign came to an end with a 1-0 defeat to Israel in Jerusalem on Tuesday night, which left them bottom of their group without a point.
It was their third defeat in the tournament following losses to Italy and Norway, and has piled the pressure on the England boss.
But Hoddle believes Pearce, who has led the Under-21s to the last four tournaments, should not be held solely responsible for England's failings.
Asked if the coach should resign, the former England senior manager told Sky Sports: "I would not say it is 'last resort'. He has got so much pride. I had him in my squad and I played against him as a player and that is one thing he has got - pride.
"And that is the one thing he would demand from his players. He obviously has not seen that in all of his players in this tournament and that is what has hurting him."
Following the defeat, Pearce insisted the players should take responsibility for England's disappointing campaign, which saw them score a solitary goal.
And Hoddle said the boss was right to throw the spotlight on the players.
"Sometimes you can say those things to the players in the dressing room," he said.
"They need to hear that. They know they have underperformed. Nought points in the league tells everything and the lack of creation tells everything. He is now putting the emphasis on the players and rightly so. They have not performed."
The former England manager insisted major structural changes are required if they are to challenge for silverware in future tournaments.
He suggested the senior England manager should spend more time with the Under-21s when possible, especially during tournament.
He also said the FA should reinforce rules to make sure players selected for international duty turn up - and suggested splitting the Championship in to two leagues to ensure young players do not play too many games.
"Whether it is Stuart re-signing or a new person coming in, if the FA don't change the structure and help the coach why would anyone want to take the job?" he said.
"Stuart has qualified four times and probably had fewer players to play with in the tournament.
"If you have played 30 games in the Premier League, Champions League games all season and playing for the England first team, I understand fully. Those players don't touch this competition. But we are not saying that.
"There are a lot of players that could have been down here and strengthened this squad and gone on to perhaps win the tournament. I really believe that. If we ever play our strongest team, we will be in the semi-finals at least. That is the problem any new coach will have."
Hoddle, who denied he would be interested in succeeding Pearce at Under-21 level, hopes the appointment of Greg Dyke as the new chairman of the FA will lead to substantial changes that are required.
Asked he would be interested in the job, he said: "I've had the big job. Unless they change the rules, any manager going in there is going to have the same old problems.
"Greg Dyke is coming in and I think he will do a smashing job. I really do. I think he is someone who will not be the norm and try to change things and I am hoping that he does. Realistically we know we need to change so many things.
"Then there is a generation of footballers that the FA are trying to change at younger ages, and they are trying.
"We are now on our way but it has taken us 20 years, so we have got to produce a new generation of footballers that can cope with the ball."