What kind of ACL surgery did your dog have? How has the vet determined that the problem is now the meniscus and not a failure of the original acl surgery? Is this vet an experienced orthopedic vet? Have you thought about getting a second opinion?
In answer to your question, yes a dog can live without a meniscus, BUT degenerative arthritis will set in just that much quicker because the bones are constantly rubbing against each other. The reason that the dog seems to be getting better for periods without the prednisone is because the inflammation stablizes the joint. However, I am a bit confused as to how the meniscus has suffered further damage AFTER acl surgery. Is your dog on a g/c supplement? What kind of activity restriction did you impose after the surgery and for how long?
My newfie girl had ACL surgery (a TPLO) in August of 2007, and my son's newf has elbow displaysia - so I have done quite a bit of research into bone issues.