When you're RPing, you have to take on the mindset of the character. And good RPers really get into the mindset of their character. So yes, it would be good RP to come up with disgusting racial slurs and use them on your enemies. This would especially apply to the Bretonians, since they are currently losing the war.
Now, with that in mind, we all have to remember that we are playing a game, with other real people. I don't like to put it this way, but here goes: the person you're insulting may not be as good an RPer as you might be, and might not brush off an insult to his character as just being RP. Unfortunately, when this happens, people get into yelling matches and sanction reports get filed. Some people aren't that great at RP, or rather, the mental game of playing a a character and not letting anything in the game really get to you.
So yes, in wartime, people call each other terrible names. If this was a much more mature RP, with very experienced players and the guidelines specifically laid out saying "yes, you can call each other bad names, with the agreement that nobody takes it personally" then fine. But this is not that, this is Discovery FL. The average player is just not that mature. So we restrict ourselves in RP, for the purpose of not hurting anyone's feelings outside of RP.
Let's put it this way: would this server be a lot of fun to play on if being racist in-character was OK? Called you a bad name? "I was just being in-character, learn to rp noob." You might laugh, but that is exactly what I see happening.
So yes, we should limit the in character racism. But the mark of a really good RPer would be to come up with some creative insults that don't involve racism.