the term we were universally using to distinguish music that came from Western Europe and white USA and Canada was "Caucasian".

There are many more people whose genetic type is "Caucasian" and who have different cultures and music. Also, there are non-"Caucasian" people who make the same music, and the culture also exists in ANZ and other countries; think of Dame Kiri Te Kanawa as an example for both.

Summary: do not confuse genetic types with cultures, particularly if antagonisms from history are involved.

suggest a better alternative, please.

"Music of Western European heritage". To describe your folk festival, you may find even more specific descriptions. Note that many features of such music have in fact been taken over from other traditions, as amply discussed in Mudcat. Still, the audience of that festival may not be acquainted to music from, say, Latvia, even if the singers are "Caucasian" to the full satisfaction of the most picky racists. You may therefore ask for advice from that audience themselves, although like the other posters to this thread, I do not expect them to object to your plan.