I'm having this exact same problem. The directory 'language' is located in the same place as the eggdrop executable. My config file is in the same directory too.
I don't see anything in the config file pertaining to the location of the language files.
Well, the docs for installing eggdrop talk about adding the install location to your $PATH. (If you install under Mac OSX that would be /opt/local/bin). All very well, but in my opinion that sets up unreasonable expectations about how that might help matters. It doesn't help at all.
Yes, if it's added to your $PATH you will be able to launch eggdrop by typing 'eggdrop' in any terminal, but it will quit immediately when it can't find the supporting files (languages, scripts etc.) because they are located in subfolders which are not added to $PATH.
In other words you MUST first cd to the eggdrop installation folder before running it. For the path (heheh) of least resistance, put your config files in that folder too.
This is probably obvious to many, but it's the docs which mislead, implying more than is actually delivered by the installer. How hard can it be to get the installer to hook up the default subdirectories properly???
My advice: Don't bother putting the eggdrop install folder in your $PATH, it doesn't make life any easier, in my opinion. Just navigate to that folder first, before launching eggdrop, and all we be well.
or you could make a small shell script (like the botchk script that comes with eggdrop) and have that script cd into the bot's homedir and launch the bot, then put that script into your path and launch it from anywhere..