I see a lot of discussion of legality, fair enough.
What I am surprised by is the lack of discussion of security. Or that the German government (or some other) didn't weigh in.
One of the dastardly uses for connecting tickets, particularly where boarding a flight does not require a check of ID, is enabling people to go to places undetected.
Person A buys a ticket in X for destination Z or to X from anywhere else but desires to arrive in destination Y.
Person B buys a ticket to destination Y that connects through X. They meet up in the airport - Person A leaves and Person B takes the Person A boarding pass to Z.
Frequent usage of hidden city destinations makes finding this practice significantly more expensive and difficult.
I am fairly sure the hidden city prohibitions are not explicitly to prevent this practice, but it is a consequence.
On the legality side:
The question I do not see posed or answered is whether Lufthansa has the right to see that its services are used in the way Lufthansa deems acceptable.
That's the real question: would Lufthansa be required to enable a practice which clearly is against its intended business practices?
Certainly I understand that the customer has rights too - but it seems odd to be indignant in favor of a customer asserting their rights while also having intent to abrogate the terms of the sale. While I'm not a lawyer, I do wonder if fraudulent intent invalidates at least some customer rights.