Re: If I move my entire M2 directory to an external hard drive, can I still play from it?
It will help if you primary installation is outside the program files directory, due to virtual store issues - not sure if that is possible with Steam (unless Steam is installed outside as well). If your base installation is identical to the previous install (from the M2TW directory down) then you should not have problems using your old saves.
Seeing that you can have unlimited mods installed (simply copy Steam's medieval2.exe file and rename it to kingdoms.exe to play mods straight from the desktop shortcuts) I am not sure why you want to re-install or move to another drive\directory - unless you have hard drive space issues.