I ran into this problem as well. Since Salesforce does not officially support Formulas in Email Templates there seem to be a lot of things that just don't work.
Such as Displaying Picklist fields. We are also unable to convert them to text in the Template.
However, you have the option to create a Formula field that converts the Picklist to text and you are able to use that field in the Template. This is usually not the best solution since you don't want to create unnecessary fields.
The other option would be to make a VisualForce Email Template instead.
If you have a short Picklist then you can stack some IF statements.
Example with 1 IF statement:
{!IF(AND(ISPICKVAL(ABC__c.Language__c, "English"), ABC__c.Country__c="USA"), "English", null)}
Example with 2 IF Statements:
{!IF(AND(ISPICKVAL(ABC__c.Language__c, "English"), ABC__c.Country__c="USA"), "English", IF(AND(ISPICKVAL(ABC__c.Language__c, "Spanish"), ABC__c.Country__c="USA"), "Spanish", null))}
Example with 2 IF Statements in a cleaner way:
{!IF(AND(ISPICKVAL(ABC__c.Language__c, "English"), ABC__c.Country__c="USA"), "English", null)}
{!IF(AND(ISPICKVAL(ABC__c.Language__c, "Spanish"), ABC__c.Country__c="USA"), "Spanish", null)}
This starts to look messy though and I am not sure about the limits. These are just the possible workarounds to the issue that I found.
Hope this helps someone even though the question is so old!